The big-box industrial product, defined as modern buildings of 200,000 square feet or larger with ceiling heights of at least 28 feet, has been a key driver in the industrial market over the past several years. These large-scale warehouses and distribution centers have seen significant demand, particularly in response to the pandemic, leading developers to focus heavily on this sector. As we move through 2024, understanding the dynamics of this niche market is crucial for investors looking to capitalize on emerging opportunities.
The Landscape of Big-Box Industrial Market
Core markets such as the Inland Empire, Dallas-Fort Worth, Atlanta, Chicago, Northern-Central New Jersey, and Eastern Pennsylvania Tri-State have traditionally been the hotspots for big-box industrial products. These regions continue to attract significant interest from occupiers due to their strategic locations near major logistics hubs and growing population centers. However, secondary markets are gaining traction, driven by similar factors and presenting new opportunities for investors willing to explore beyond the established centers.
Market Performance in 2023
In 2023, the big-box industrial market experienced a shift. Vacancy rates climbed, and demand softened compared to the record-breaking years of 2021 and 2022. Net absorption of big-box buildings, which had exceeded 200 million square feet annually since 2020, dropped to 151 million square feet in 2023, marking the lowest total since 2018. The largest buildings, those 750,000 square feet and larger, saw the highest absorption rates, totaling 69 million square feet, or 5.9% of the total inventory for that size category.
Despite the drop in demand, development activity remained robust, with developers completing 310 million square feet of new supply. This figure more than doubled the demand recorded for the year. The most significant increase was in buildings 750,000 square feet and larger, with 103 million square feet of new construction, increasing the inventory by 8.8%.
Implications for Investors
The influx of new supply has pushed vacancy rates higher in nearly every big-box market, with the U.S. big-box vacancy rate reaching 10% by the end of 2023, a notable increase from the 5.6% rate at the end of 2022. This rise in vacancy rates, particularly driven by new construction, highlights the importance of strategic investment decisions. However, there are positive signs on the horizon. The pace of new development has slowed significantly, with the total big-box space under construction dropping by 46% year-over-year to 182 million square feet.
Looking Ahead to 2024 and Beyond
While new supply is expected to outpace demand in 2024, there are indicators of an upcoming stabilization. Several large leases announced in the first half of 2024 suggest a potential uptick in tenant demand as the year progresses. As construction starts to decline and development activity decelerates, vacancy rates are anticipated to plateau by early 2025.
For investors, this period presents both challenges and opportunities. The slowdown in development activity and the anticipated stabilization of vacancy rates could set the stage for a new growth cycle, especially with the economic direction becoming clearer post-election. Investors should focus on markets with strong fundamentals and emerging secondary markets that offer growth potential due to their proximity to major logistics hubs and expanding population centers.
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