The U.S. industrial sector continues to cool after two years of unprecedented, pandemic-driven expansion. While tenant activity slowed in the first few months of 2024, demand remains positive relative to Q1 2023. As expected, new completions (supply) continue to exceed net absorption (demand), causing the national vacancy rate to trend marginally higher. At 5.8%, however, the Q1 2024 vacancy rate remains well beneath its long-term historical average of 7%. Rent growth is also trending back towards the long-term average. In Q1 2024, industrial rents grew 6% on an annualized basis, versus 10% and 20% in ’23 and ’22, respectively.
As we have detailed in prior updates, the project pipeline is thinning out, and rather quickly at that. In today’s higher interest environment, fewer developers are breaking ground; in fact, industrial construction starts are down 50% year-over-year (YOY). In our view, the stage is set for the fundamentals to quickly tighten on the other side of the supply wave. So, while demand growth is currently cooling, at present net absorption appears to be retracing in an orderly fashion. Similarly, vacancy rates are rising as new capacity outstrips demand growth, yet controllably so. Finally, while rent appreciation is slowing, growth remains solidly positive. Based on our experience, this is exactly what a soft landing looks like for the industrial sector.
