The U.S. industrial real estate market showcased remarkable resilience and growth in the second quarter of 2024, with net absorption more than doubling from the first quarter. According to Cushman & Wakefield, industrial net absorption soared to 46.3 million square feet, a significant leap that underscores the sector's robust performance amid challenging economic conditions.
Surging Absorption and Key Market Performances
The impressive absorption figures are largely attributed to the delivery of new industrial products with tenants already in place. Over half of the U.S. markets tracked by Cushman & Wakefield reported positive absorption in the second quarter. Notably, Dallas/Ft. Worth led the charge with 13.8 million square feet of quarterly absorption, followed by Phoenix with 7.4 million square feet, and Houston with 4.3 million square feet. This surge reflects the continued demand for industrial space in key logistics hubs and growing metropolitan areas.
Despite the overall positive trend, the West Coast experienced significant negative absorption. Markets like Portland, Seattle, Oakland-East Bay, and Los Angeles collectively saw 9.6 million square feet of negative absorption in the second quarter. This disparity highlights regional variations in market dynamics and the shifting patterns of industrial demand.
Leasing Activity and Market Trends
New leasing activity, although slightly down by 2.8% from the first quarter, remained robust at 137.2 million square feet. This figure is 11.2% higher than the 10-year pre-pandemic average of 126.9 million square feet, illustrating a strong recovery and sustained interest in industrial spaces. Year-to-date, the U.S. has recorded over 278 million square feet of new transactions, positioning the market to surpass 500 million square feet for the tenth consecutive year.
Key markets have been particularly active, with seven exceeding 10 million square feet of deal volume. Additionally, the second quarter saw 11 deals greater than 1 million square feet, bringing the year-to-date total to 27. This level of activity is a testament to the continued appetite for large-scale industrial facilities, driven by the growth of e-commerce and the need for efficient supply chain operations.
Rising Rents and Increasing Vacancy Rates
Asking rents for industrial space increased to $9.97 per square foot in the three months ending June, up from $9.75 in the previous quarter. This 3.7% year-over-year increase, while notable, represents the slowest growth rate since 2020. The moderation in rent growth suggests a balancing act between supply and demand as the market adjusts to new dynamics.
However, the increase in vacancy rates presents a challenge. The national vacancy rate edged up to 6.1% in the second quarter, compared to 5.7% in the first quarter and 4% a year ago. The southern U.S. faced the highest vacancy rates at 6.6%, largely due to new construction deliveries amounting to 121.1 million square feet. Despite the rise, current vacancy rates remain below the 10-year pre-pandemic average of 7%, indicating a still-healthy market.
Future Outlook: Balancing Growth and Supply
Looking ahead, Cushman & Wakefield anticipates higher vacancies moving into next year. However, by the second quarter of 2025, the firm expects market conditions to "tighten" as demand catches up with supply. This tightening is projected to moderate the rate of asking rent increases, which is expected to slow to 3% by the end of the year and further to 2.2% in 2025. By 2026, rent growth is forecasted to dip to single digits, reflecting a more balanced market.
The construction pipeline, a critical factor in occupancy rates, is also shrinking. The volume of new construction decreased by 14% quarter-over-quarter in the three months through June, signaling a slowdown in new industrial space entering the market. This reduction is expected to help stabilize vacancy rates and support rent growth moderation.
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