Why 7 Out Of 10 Industrial Lease Searches Are Coming Up Empty

Industrial tenants are keeping commercial real estate brokers busy with property tours and lease negotiations. But in today’s market, only 30% of potential deals even have the possibility of turning into a signed lease, according to a JLL report. 

An uncertain macroeconomic picture — and an incoming U.S. president who has promised to upend global trade policy — is partially to blame for the lackluster conversion rate. But industrial users are also shifting their logistics strategies, often opting to outsource rather than execute a lease. 

The leases that are getting signed are taking longer to close, with an average search in 2024 lasting nine months, according to JLL. In 2020, when supply chain disruptions from the pandemic led to an explosion of industrial leasing, deals got done in an average of four months.

Mehtab Randhawa, global head of industrial research at JLL and an author of the report, said deals are taking longer to close for a combination of reasons. More decision-makers are being asked to sign off on deals in an environment of high debt costs, supply chain logistics have grown more complicated, and occupiers are increasingly focusing on optimization and efficiency. 

“That decision-making timeline, that's going to continue to go up,” Randhawa said. “It's not possible for it to shrink and for decisions to get made faster.”

Macroeconomic uncertainty and the high cost of debt are stifling some activity, but conversion rates are expected to continue to lag even as the market picture becomes clearer. 

Third-party logistics providers, which offer industrial solutions to users who might otherwise have had to lease their own space, have exploded onto the scene in recent years. Their increased presence, while somewhat counterbalancing the falloff in overall leasing volume, has led to more tenants touring space available for lease, then signing a deal with an outside provider rather than with a landlord. 

The 3PL sector has leased more space than any other market segment in each of the last five years, with demand for space from the sector growing by 66% since 2020, according to JLL. For 2024 and 2025, the sector is forecast to account for 21% of all industrial leasing volume. Construction, machinery and materials businesses, at 9% of leasing volume, rank second. 

“Companies no longer want to take that ownership of location, strategy, distribution and supply chain,” Randhawa said. “Instead, they're better off outsourcing and having more flexibility by giving a 3PL company that contract and letting them handle a part of that portfolio.” 

The sentiment is a stark contrast to the pandemic years, which saw a wave of new requirements, elevated leasing volume, rising rents and limited availability. 

U.S. industrial vacancy was at 7.3% at the end of the third quarter, according to Savills, up 2 percentage points from a year prior. It is forecast to continue a slow upswing after more than 260M SF of new inventory delivered in the last year, with another 357M SF under construction. 

New construction starts have normalized after a pandemic-era flurry of activity, but their long tail of delivery timelines is likely to put downward pressure on asking rents, which averaged $9.57 per SF nationally at the end of September. 

“During Covid, the tenants were on the wrong side,” said Wayne Schuchts, Miami-based managing principal for SRS Industrial. 

At the time, industrial leasing volume was so high that landlords could tell tenants that “they had to do this term, they had to pay this rate and they had to decide by tomorrow.”

“That skewed the compression of decision-making,” Schuchts said. “Right now, markets are much more normalized.”

That has given tenants more leverage, and they are pushing for concessions in negotiations more aggressively than even before the pandemic, when low interest rates and cheaper build-out costs helped bridge the gap, said Billy Snowden, an Atlanta-based principal at Lee & Associates.

“Tenants are asking for more, and it takes longer to get through comments,” Snowden said. “Leases sit on desks a lot longer.”

Occupiers are also burning through excess space that they locked in during the pandemic when some industrial users shifted from a “just-in-time” model that maximizes efficiency to a “just-in-case” model that prioritizes fulfilling orders despite potential shipping disruptions. 

As the pandemic fades, users are shifting back toward efficiency and integrating space that hadn’t previously been part of their supply chain, Snowden said.

Optimization has become the key driver of leasing decisions today as operators look to offset threats to profit margins from high material, leasing and debt prices with space consolidation and optimization. 

“Moving from a 200K SF building to a 500K SF building is expensive, very expensive,” Randhawa said. “Could you be using that money to instead put automation into your facility, retrofit your buildings and make them more efficient for the future?”

The shift in occupancy strategy will carry forward for the next several years, Randhawa said. Leasing volume is likely to start to rebound next year, she said, but activity is expected to lag historical averages in the near term as the sector begins what is predicted to be a slow but consistent recovery. 

The Federal Reserve has begun to pivot its monetary regime, but the 75 basis points in cuts to the federal funds rate since September haven't trickled into the Treasury bond market, where the rates that are used to benchmark debt underwriting have spiked over the last 90 days. 

Snowden said some of his Atlanta clients have opted to delay leasing decisions for a year or more as they wait for the debt environment to improve. The same thing is happening in Miami, Schuchts said. 

Despite the tighter market dynamics — Miami’s industrial vacancy rate in the third quarter was 5.5% and Atlanta’s was 8.2% — occupiers no longer feel the pandemic-era pressures to quickly execute a deal for fear of having no other options.

“We have several tenants” who have put decisions off, Schuchts said.

“One is a 300K SF new-to-market user for South Florida that originally was going to start to look in Q4 of 2023, and now we're going to start our search Q1 of 2025.”