by Josh Bays, on Oct 15, 2024 7:30:00 AM
Those associated with the industrial real estate industry will attest that 2022 was a peak year for hyperactivity, measured by low vacancies, increased construction starts, and peak year-over-year rent growth. This time each year, Site Selection Group, a full-service location advisory, economic incentive, and real estate services firm, summarizes key trends in distribution real estate for the current year while looking toward the future. Because not all distribution markets are created equal, real estate trends will continue to have a material impact on site selection decisions within the distribution sector.
Vacancy rates bottomed in Q2 2022 and are projected to peak in Q3 2025
Source: CoStar
As a result of the industrial market being so active over the past couple of years, national vacancy rates hit an all-time low of 3.7% in Q2 2022. This time last year, the market thought vacancy rates would peak at 6% in mid-2024, but revised data suggests vacancy rates will slightly rise through Q3 2025. Despite the swings in vacancy rates demonstrated in the chart above, rates are still low enough that there has been no material impact on absolute rental rates, but a significant impact on rent.
Year-over-year rent growth is close to bottoming out at 2%
Source: CoStar
It is crazy to think that just two years ago market industrial rent was growing at 11.3% year-over-year. Since then, the percentage increase in rental rates has cooled off significantly. This time a year ago, it looked like annual rent growth would average 4% for the foreseeable future. But, the revised data tells us that the rent growth slide isn’t over and should bottom out around 2.5% by year-end.
The peak in vacancy rates and bottoming rent growth is heavily impacted by record-setting deliveries
Source: CoStar
Construction starts for warehouse space increased steadily from 2020 and peaked in Q3 2022 but began to slide in late 2023. And true to the signaling from large institutional developers, so far in 2024, construction has slowed down significantly relative to the preceding four years. Obviously, this can be attributed to a slowdown in projected demand, but other factors like the rising cost of debt and election-cycle uncertainty have had a profound impact.
Market cap rates are cooling building sales
Source: CoStar
Market cap rates have risen above pre-pandemic levels and are not projected to peak until Q3 2025. The 20% increase in cap rates since Q1 2021 has shifted the perspective of many institutional developers. There was a time during historic low cap rates when occupiers who wanted to own their assets found it difficult to purchase from developers. Now that the investment sales market is not yielding the same returns (and high vacancy rates and longer hold times), Site Selection Group is noticing many developers are now open to building sales.
Conclusion: Take advantage of a tenant’s market
Due to changing industry trends favoring tenants, Site Selection Group is experiencing significantly more flexibility from landlords compared to recent years. If you need industrial space, you have a real opportunity to drive more value with many business and economic terms.
