Industrial Vacancy Expected To Peak In Mid-2025 As Construction Drops 50%
The industrial sector has struggled to regain confidence, but there may be a silver lining coming in 2025.
The vacancy rate in the U.S. industrial market rose to 6.6% in the third quarter of 2024, but it grew at the slowest pace since 2022, according to a report by Colliers. Although vacancy is expected to keep ticking up, Colliers projects it to peak in mid-2025 at about 6.8%, then start to decline.
Following the pandemic boom, the industry has struggled to keep up with the record pace of construction, but the pipeline has shrunk dramatically.
After hitting a record 711M SF in 2022, total space under construction has dropped by 53%, now sitting at 331M SF, according to the report. New supply delivered in Q3 totaled 76M SF, 54% below the 163M SF that delivered in the same quarter last year.
Overall construction is expected to continue falling over the next two quarters to the prepandemic average, which was below 300M SF.
With all the new buildings hitting the market, rent growth has slowed. The average weighted rents rose 9% year-over-year to $11.08 in the third quarter, but were flat over the previous three months. Rents declined in 15 markets, according to Colliers.
National average rent is still expected to rise going into 2025 and 2026, but closer to the historical average of between 2% and 7%.
Austin is the fastest-growing market in the country, with 17.2M SF under construction, or 18.7% of its existing inventory. It is adding more than twice as much supply as second-place New Hampshire at 9.1%. Austin's industrial vacancy rate was 13.6% at the end of the third quarter.
The South region, which covers from Texas to Florida and up to Virginia, has roughly 6B SF of inventory but is still adding more space than the Northeast, Western and Midwest regions, with 140.6M SF under construction. Its vacancy rate is also the highest at 7.8%, per Colliers.
The industrial market is still struggling to find direction. Tenants are slow to ink deals, and commercial real estate investors are struggling to see the light at the end of the tunnel. Top owners have expressed hope that this is the market's bottom and predict improvement in mid-to-late 2025, Bisnow previously reported.
The industrial and economic outlook points to uncertainty with the recent election results. The upcoming effects of tariffs, changes in net migration and new policies are unclear, but an economic slowdown is still expected to come to fruition, according to Colliers.
“We are near or in an inflection period right now. This is a time when forecasts have very high variability,” Prologis President Dan Letter said on the company’s Q3 earnings call last month. “The near-term view on rents is pretty much in line with where we were 90 days ago. Customers are very engaged, but they are just not making decisions. So, we expect this softness in rents to continue throughout this period.”