The industrial market is expected to recalibrate in 2024.
The industrial sector produced unprecedented growth between 2021 and 2022 before tapping the brakes in 2023. After extremely low vacancy rates, elevated development activity, robust leasing levels, and record-high rent growth, the market was bound to experience a slowdown. The industrial sector is expected to recalibrate in 2024, with activity levels similar to pre-covid averages while rent growth normalizes to a more moderate pace. Construction deliveries during the first half of the year are expected to contribute to rising vacancy rates, but decelerating construction starts will help keep vacancy rates low in 2024.
E-commerce will continue to drive industrial growth
Over the past decade, e-commerce has become a highly correlated metric with the industrial sector and will continue to push industrial demand in 2024 and beyond. While e-commerce (as a percent of total retail sales) will continue to grow at a steady pace, the year-over-year rate of growth has recently stabilized between 5% and 6% compared to 10% to 11% pre-covid. As consumer confidence continues to rebound, retail spending is expected to increase, prompting retailers and industrial tenants to expand their warehousing needs.
MACRO INDUSTRIAL TREND: E-COMMERCE
West Coast markets are experiencing a slowdown in activity and rising vacancy rates
Although most industrial markets across the county are experiencing similar industry drivers and regional challenges, every market is also nuanced by numerous factors including development activity, tenant demand, e-commerce penetration, supply chain efficiencies, and so on. When looking at the performance of each industrial market across the West Coast, markets such as Phoenix and Inland Empire are expected to see a greater rise in vacancy rates, largely due to high levels of new development activity. Phoenix currently has more than 44M square feet of projects under construction, accounting for 10% of its base inventory, while Inland Empire has nearly 30M square feet under construction, accounting for 5% of its base.
INDUSTRIAL VACANCY RATES BY MARKET
Activity levels in the first half of 2024 are expected to be relatively slow
West Coast leasing activity grew to its highest level in history, posting more than 215M square feet in 2021. Net absorption was 113M square feet, and development activity topped out at 85M square feet under construction. However, in 2023, activity levels diminished across the board with 141M square feet of leasing activity, 13M square feet of negative net absorption, and 53M square feet of projects under construction. Activity levels in the first half of 2024 are expected to be relatively slow and have a similar cadence to 2023, while the second half of the year will perform closer to pre-pandemic averages. New development will remain low during the near term, helping to bolster the future growth of industrial.
WEST COAST INDUSTRIAL 3-YEAR FORECAST
Vacancy rates will increase in 2024 but remain low while rent growth continues to cool
Compared to historical averages, both vacancy rates and rent growth are on solid footing, even during a relatively slow year in 2023. However, perspective can be skewed from recency bias as West Coast vacancies were consistently in the mid-2% range and rent growth averaged between 15% and 30%. At the end of 2023, the West Coast vacancy rate sat at 4.9% and is expected to experience a nominal increase in 2024, largely due to early-year completions coupled with subdued leasing activity. As a result, rent growth is projected to shift to rates closer to historical norms below 10%, with some markets possibly experiencing relatively flat rent growth, year-over-year.
WEST COAST INDUSTRIAL 3-YEAR FORECAST