Industrial

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Industrial

LOWER GEAR AS EXPECTED

Economic Drivers

U.S. manufacturing activity—despite some pockets of reshoring—has been subdued as evidenced by the ISM Manufacturing Index, which has been in contractionary territory for 18 of the last 19 months. Employment in manufacturing has gone sideways over this timeframe as well.
Since April 2022, the temp jobs subsector has been consistently losing jobs which now total 444,500. That is a whopping 12.6% decline from its peak, which is noteworthy because the majority of occupations within this subsector are manufacturing or transportation/warehousing oriented. This is in addition to 80,000 job losses in transportation/warehousing since August 2022. These trends align with the softening absorption backdrop we had forecasted for in 2024 and early 2025.
A slowly improving global growth picture, however, is likely to lead to a rise in manufacturing activity, exports and trade—which will all benefit industrial CRE heading into 2025.
E-commerce continues to gain market share in consumers’ wallets, and a resilient job market coupled with real income growth should lead to steady consumption, particularly of nondurable goods.

Outlook

While e-commerce continues to increase as a percent of retail sales, some of the pull-forward effect—firms building out sooner and faster during the pandemic—will weigh on the demand outlook for 2024 and the first half of 2025.

Absorption is expected to hit a trough of just over 100 msf in 2024 before roughly doubling in 2025. We expect a return to a more normal demand run rate in 2026. Markets where rents grew the most during the 2020-2022 timeframe are now seeing demand-led pullbacks driven by consolidation efforts.

New supply will be a key factor driving vacancy in 2024 as another 381 msf delivers throughout the market this year. The pipeline is dropping off significantly and we forecast only 160 msf will be delivered in 2025. From there, lower interest rates and improving fundamentals will help drive a new construction cycle.

The imbalance in supply and demand seems starker than it is—vacancy is expected to peak in early 2025 at 6.7% before starting to compress back toward 5% by the end of our five-year forecast horizon. For context, this is consistent with the lowest vacancies recorded in prior cycles, meaning that this cycle is fundamentally different.

Rent growth is moderating on par with expectations after having grown by 54% since Q4 2019. We believe rent growth will come in at 3% in 2024 and 2% in 2025 before picking back up to the mid-single digits.