For the data behind the commentary, download the full Q1 2024 U.S. Industrial Report.
Leasing Activity on Par with Pre-pandemic Averages
Quarterly new leasing activity remained healthy throughout the first quarter with 128.7 million square feet (msf) of transactions completed, 3% higher than the 10-year pre-pandemic (2010-2019) average. The Inland Empire (11.2 msf), Dallas/Ft. Worth (10.1 msf) and Houston (9.1 msf) markets led the way. There were 30 new deals of 1 msf or greater inked all last year, but in just the first three months of 2024, 15 leases of this size were already transacted and 10 of those were e-commerce occupiers. The trend heard on the ground is that these larger deals are taking longer to transact primarily due to cost containment measures related to economic uncertainty and a general slowing in consumer demand for goods—a trend we will be watching carefully throughout the year. Many larger tenants (100,000 sf +) remained focused on new construction as 67% of the square footage leased in the first quarter was within buildings built since 2020, despite accounting for just 12% of the nationwide inventory.
Absorption Slows but Remains Positive
Tenant demand slowed in the first quarter, down from 48 msf observed in the prior quarter and from the 77 msf recorded one year ago. The sharp deceleration in demand was a surprise and something we will be keeping a close eye on. That said, in any given quarter, it is not uncommon for demand to surprise one way or the other. When looking at the four-quarter rolling average, net absorption has averaged roughly 42 msf per quarter—which is more within range of our forecast for 2024 (145 msf for the year). Despite the weaker quarter, there were several bright spots. Eight markets posted more than 1 msf of quarterly net occupancy gains in Q1 2024. Markets which have seen healthy new supply totals with tenants in place propelled absorption, such as Houston (5.1 msf), Savannah (3.6 msf), Chicago (2.8 msf) and Austin (2.4 msf). Of the 83 U.S. markets tracked by Cushman & Wakefield, there were 43 which recorded positive absorption in the first quarter, including 20 markets where net absorption accelerated YOY. On the other end of the spectrum, there were 39 markets that registered negative absorption in Q1. These declines largely reflect occupiers that either took on too much space during the pandemic and are now giving some of the space back or shedding space as they consolidate operations in realization or anticipation of slowing demand for goods.
Vacancy Rises Again Amid Healthy New Supply Totals
The overall vacancy rate climbed another 60 basis points (bps) to 5.8% as new speculative supply pushed the rate higher for the fifth straight quarter. Although the vacancy rate is elevated compared to the previous three years, it is still 120 bps below the 10-year pre-pandemic average of 7%. Regionally, the Midwest boasted the tightest vacancy rate in the first quarter at 4.9%, while the South recorded the highest rate at 6.6% as much of the new supply delivered (54%) was concentrated there. Meanwhile, the sublease vacancy rate ticked higher quarter-over-quarter (QOQ) by 10 bps to 0.6%. Vacant sublet space, however, yielded its lowest quarterly change since Q3 2022 at just 4.8%, a sign that it may be plateauing.
Delivery Totals Down as Pipeline Shrinks
A healthy 340 msf of new product will likely be delivered in 2024, resulting mainly from development projects that started last year. The supply pipeline, however, is anticipated to thin quickly after that. Nearly 115 msf of new industrial product was delivered in Q1, 87.3% of which was on a speculative basis. However, industrial deliveries have been trending lower since peaking in Q3 2023 with deliveries in Q1 2024 down 28.4% from the prior quarter, representing the lowest quarterly total since the first quarter of 2022. Only Dallas/Ft. Worth delivered more than 10 msf during the first quarter.
The under-construction pipeline has declined by 10% since the end of 2023 and is down 40% YOY as developers have pulled back on starts, especially speculative developments amid the backdrop of slowing demand for space and higher interest rates. This is the lowest the future construction pipeline has been in three years. Moreover, the share of the under-construction pipeline that is purely speculative is also trending lower—the low 70% range—another sign that developers are waiting for the market to absorb more of the existing supply wave before starting up new projects without a tenant in place. Approximately half of the 115.7 msf of build-to-suit product underway consists of manufacturing facilities as companies such as TSMC, Hyundai, Panasonic, Intel, and General Motors have major sites under development nationwide.
Asking Rents Starting to Flatten and Even Soften in Some Markets
The U.S. average asking rental rate was flat QOQ at $9.73 per square foot (psf) and the annual growth rate decelerated to 6%. The Northeast region finished the quarter with the highest rates ($13.65 psf) in the U.S. asking rents in the Northeast were up 9.2% YOY, the highest annual growth rate of any region. Some of the markets which recorded the sharpest growth in the previous three years have seen modest declines since early 2023 as the market rebalances. Of the 16 markets which posted annual rent growth of 10% or higher in Q1 2024, nine were in the South region. In 18 markets, asking rents declined YOY, up from 15 markets at year-end 2023.
For the data behind the commentary, download the full Q1 2024 U.S. Industrial Report.
