RECALIBRATING MARKET DYNAMICS

In 2021 and 2022, the industrial market experienced record-setting growth, with extremely high levels of demand, historically low vacancy rates, and an unprecedented rise in rental rates.

However, the sector began to soften in 2023 as overall fundamentals shifted. During previous cycles, when long-term fundamentals deviate, whether overly positive or negative, they tend to course correct and recalibrate. This has been the ongoing trend in the industrial market throughout 2024.

West Coast Forecast

 

DEMAND DRIVERS

Year-to-date, West Coast port volume increased by approximately 17% year-over-year, led by the Port of Long Beach (+20.0%) and the Port of Los Angeles (+17.6%), the two largest U.S. ports.

This growth is promising because cargo trends often provide insight into the economy’s health, and increased port activity typically translates into greater industrial leasing demand. Additionally, after losing market share in total container traffic in recent years, West Coast ports have shown a positive uptick, signaling potential for future growth.

E-commerce activity has been strongly correlated with industrial demand over the past decade, playing a key role in industrial demand. As consumer purchases rise, distribution warehouses are needed to store inventory. E-commerce growth surged in 2020 following the pandemic, driving historic demand for industrial space. As a result, vacancy rates plummeted, and development activity soared, with new starts reaching an all-time high by mid-2022. This was especially true in large distribution markets like Inland Empire and growing distribution hubs like Phoenix and Las Vegas.

 

17% YEAR-OVER-YEAR PORT VOLUME GROWTH

7.5% YEAR-OVER-YEAR E-COMMERCE GROWTH

WEST COAST PORT VOLUME

 

INDUSTRIAL MARKET FUNDAMENTALS

As e-commerce demand recalibrated and settled, industrial market fundamentals began to shift. Vacancy rates increased, sublease space flooded the market, development slowed, and rent growth stalled.

Distribution hubs that saw robust construction also experienced significant vacancy rate increases — Phoenix rose from 4.3% in 2022 to 11% in 2024, and the Inland Empire from 1% to 7.3%. Even with strong healthy activity, it will take longer for those markets to find a balance between supply and demand. West Coast construction starts have declined by 50% compared to the highs of 2022, which will help temper rising vacancies in the near and mid-term.

As vacancy rates increased, so did sublease space, driven by tenants reassessing their warehouse and distribution needs. By Q1 2024, sublease space accounted for 13.8% of total available space, the highest on record (compared to a 15-year pre-COVID average of 7.1%). While this trend rose steadily for two years, it saw its first decline in Q2 2024, dropping to 13.5%, suggesting sublease space may have peaked and that demand might soon increase.

Leasing activity on the West Coast has gradually declined since its peak in Q1 2022, when the trailing four-quarter total reached 304.8 million square feet. By Q2 2024, this figure had fallen to 176.4 million square feet, 42% below the 2022 peak. For context, the post-COVID two-year average was 250 million square feet, while the 10-year pre-COVID average was 240 million, and the 20-year pre-COVID average was 175 million. Essentially, leasing volumes have returned to pre-COVID norms. The key question remains: Will demand pick up in the next 3-6 months or stay subdued?

Anecdotal evidence suggests that demand is beginning to recover, though it typically takes 3-6 months before new demand begins to impact statistics. In the near term, supply and demand imbalances are expected to persist, with slow growth. New deliveries are expected to push vacancy rates slightly higher before stabilizing. By mid-2025, the West Coast industrial market should see sustained momentum, with increasing leasing volume and positive net absorption.

VACANCY RATES

 

SUBLEASE SPACE

 

CONSTRUCTION STARTS

 

LEASING ACTIVITY

 

 

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Contact

BRIAN HATCHER President & COO brian.hatcher@kidder.com 206.296.9600

GARY BARAGONA Vice President, Research gary.baragona@kidder.com 415.229.8925

 
The information in this report was composed by the Kidder Mathews Research Group.
 

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