Industrial
CUSHMAN & WAKEFIELD RESEARCH
Normalizing but Context Matters
At the turn of 2022, we made an unpopular call that industrial demand would not just slow from its blistering pace of the prior two years, but that it would even dip below the 2015-2019 average run rate. That call was on target, and it was based on a trifecta of trends that were clearly going to temper occupancy gains this year and next. This “trends trifecta” includes a moderation in goods spending, dealing with the hangover from demand that had been pulled forward during the pandemic and a reversion towards pre-pandemic behaviors for many industrial users. This is now manifesting as industry recessions across some industrial sectors, such as manufacturing and freight.
📣 Jason Price, Americas Head of Logistics & Industrial Research
Coming off frenetic back-to-back years in 2021 and 2022, industrial net absorption downshifted in 2023. For context, in 2021 and 2022 combined, the market absorbed just under 1.1 billion square feet, which is about twice the norm—meaning that four years’ worth of demand occurred in just a two-year timeframe. We estimate that roughly half of this demand came from pull-forward impacts as companies—namely those tied to online shopping—had to build out facilities networks sooner and faster than planned. The flip side of this surge is that it “borrowed” demand from the future, which is one reason why we expected demand to moderate meaningfully this year and next. Further headwinds facing goods consumption will also lessen the pace at which occupiers scale moving forward: while real incomes are now rising, consumers also face higher interest rates, a labor market in the early stages of softening and an affordability crunch across the largest household budget line items. Given these formidable headwinds which will ultimately translate into weaker demand for goods, global trade flows will slow, and freight markets will remain oversupplied in the near-term.
Freight markets are not the only sector with over-capacity at this time—the labor market for many industrial workers has softened in the last year. Employment in transportation and warehousing is down by 56,000 jobs over the last 12 months (Oct 2023 vs. Oct 2022), led by losses in warehousing (-78,000), final mile (-28,000), and trucking (-27,000). Despite a renaissance of reshoring, manufacturing jobs have been flat over this time (+6,000) as widespread weakness is buoyed by strong activity in the auto, battery and semi-conductor sub-sectors. Consumer spending on travel and experiences has also increased materially, leading airline employment to be the only bright spot (+54,000) for the transportation sector. It is not atypical to see weakness in the industrial labor markets as turning points in the economy near, including the onset of recessions.
This somber backdrop may paint a picture of a market set to correct but the reality for the industrial real estate market is much less bleak.
Context matters. Cushman & Wakefield has been tracking industrial data going back to 1995. From 1995 to 2019, the U.S. industrial vacancy rate averaged 8%. The industrial boom that we observed over the last few years brought vacancy down to 2.8% in Q2 2022, which is more than twice as tight as the market had ever been. Since then, vacancy has been drifting higher, rising to 4.7% as of Q3 2023. Our baseline has vacancy peaking in early 2025 at 6.2%, which would still be roughly 200 bps lower than the historical average.
Some occupiers are looking for new product to lessen the pressure on the market, but a decent
share of the existing pipeline is accounted for, and development will taper off quickly as construction starts (measured in square feet) are down by 60% thus far in 2023. Of the 538 msf currently underway, 112 msf is build-to-suit and another 39 msf is preleased. The 387 msf of vacant spec product, while confronting a softer demand backdrop, still places an upper bound on vacancy. There is a finite window of about 18 months in which occupiers may find a slightly easier market to navigate, but that will quickly fade in 2025 as vacancy starts to recompress. As we head to the second half of the decade, we forecast demand to return to its pre-pandemic pace (around 275 to 300 msf per year) while completions start to ramp back up. The current supply-demand imbalance will reverse, and vacancy will return to sub-5%.
The emphasis on vacancy is purposeful—it is, after all, the single most important predictor of where rent growth will head. Gearing down from just under 21% year-over-year (YOY) growth in 2022, we expect asking rents to climb by just a tad over 12% YOY by the end of 2023, followed by 4.1% and 3.1% in 2024 and 2025. The reprieve in the pace of appreciation for renters of industrial space will be short-lived. Vacancy is projected to hover in the mid-4% range in the second half of the decade, a level of tightness that is consistent with 4-5% rent growth per annum.
There will undoubtedly be variation across markets and within markets. Some cities are structurally supply constrained due to land scarcity or zoning, while others will benefit from demand shifts (like being a cheaper inland market near expensive coastal cities). Smaller facilities will face markedly different conditions—the smaller the building, the lower the vacancy rate and the higher the rent growth.5 In almost all cases, vacancy will remain historically tight and demand for last mile space, in particular, will remain fiercely competitive. The bottom line: although there are some near-term headwinds, the industrial sector still has extremely strong longer-term tailwinds. The next 18 months amounts to a reset to more normalized levels, nothing more or less.
