Vice grip on industrial real estate space loosens slightly, Cushman & Wakefield says

Amid a historically tight market for warehouse space, vacancy rates for U.S. industrial properties ticked up slightly in the first quarter but remained stubbornly low compared to long-term averages, according to a report from real estate firm Cushman & Wakefield.

The industrial vacancy rate ticked slightly higher to 3.6%, as demand for space moderated and speculative construction completions persisted at a healthy rate, the firm said. But while that rate has risen each of the last two quarters, the market remains historically low, stuck at 70 basis points below the five-year quarterly average (4.3%) and 170 basis points lower than the 10-year average (5.3%).

Tough economic statistics such as high interest and inflation rates will probably not help matters improve anytime soon. Looking at building projects for additional industrial space, the under-construction pipeline continued to decline modestly (-3.0% since year-end 2022) as completions outpaced construction starts. And construction starts are anticipated to further slow as the year progresses under the current economic climate, the firm said.

But those same economic forces can also be helpful, since they’re cooling the overall economy and putting the brakes on demand for space that had exploded during the pandemic. Overall net absorption started the year with 62.5 million square feet of positive demand, a drop of 48.5% compared to Q1 2022. While absorption has tapered off significantly compared to the past couple years, it is showing a normalization of market conditions to historical average and more sustainable demand levels, Cushman & Wakefield said.

“Given the voracious pace of growth the past two years and some timidity tied to a more uncertain economic outlook, deals are taking a bit longer to get done, but they are getting done and I remain upbeat on the outlook,” Jason Tolliver, executive managing director and co-lead of Americas Logistics & Industrial Services at Cushman & Wakefield, said in a release. “We continue to see a diverse mix of tenants in the market seeking space and that bodes well for future leasing activity. I think we’ll see a more normalized market than the frenzied pace of the past 24 months with industrial demand shifting back to more sustainable levels as the market powers forward.”