by Jake Wilson, on Feb 10, 2025 7:00:00 AM
The United States distribution real estate market is nearing the end of an era categorized by record speculative development. Availability of logistics buildings larger than 100,000 SF has grown by 20% over the past four years, but the delivery of new speculative construction is anticipated to fall below pre-pandemic annual averages by mid-year. This signifies the end of the era of rapid construction that peaked in 2022 when roughly 600 million square feet of new buildings broke ground.
Source: CoStar
Continued increase in vacancy
Despite another year of positive net absorption, vacancy rates across distribution properties have risen to 7.8% year-to-date; up from 6.8% this time last year. The increased vacancy isn’t due to a lack of activity but more a result of the boom in speculative development that is predicted to slow down in 2025 and 2026. Net new deliveries peaked at 151 million SF in Q3 2023 and have steadily declined since. The slowdown and general pause in new construction should allow vacancy rates to slowly drop over the next year or two so long as net absorption remains positive.
Source: CoStar
Stabilizing rental rate growth
Since the pandemic, tenants have been plagued by high market rates when it comes time to renew their leases with many being subject to 30-40% + increases in their rent. While this issue remains for tenants with expiring long-term leases, year-over-year increases to market rates have dropped to roughly 50% of the pre-pandemic five-year average. Current year-over-year rent growth is at 2.2%; down from its peak of 11.1% in Q2 2022. The stabilizing rent is a result of the flood of speculative development that has outpaced demand.
Source: CoStar
What does this mean for tenants looking to lease space in 2025?
While rates are still higher than at any other time in history, the market has shifted to benefit tenants and should remain that way until vacancy rates begin to drop.
- Tenants have a significant amount of leverage given the number of available properties.
- Landlords are being forced to be more aggressive in their concession offerings to attract tenants.
- Landlords will compete with subleases as the past two quarters have seen a record high in the sublease share of available properties (11.7% and 11.5% respectively).
- Leasing activity is likely to pick back up as the dust settles from the recent election.
