Here's Why Industrial Will Stay A Landlord's Market

Fundamentals have been softening in the industrial asset class as demand declines and the overall vacancy rate expected to rise about 75 basis points over the next year.

However, this erosion is not enough to change the landlord-tenant dynamics that current exist in the space. The industrial market will, in short, remain in landlord’s territory, a new report by Colliers says.

Prologis agrees. It recently said the competition for industrial space will increase in 2024.

Says Colliers: “With a vacancy rate hovering around the low fives, the market will remain in favor of landlords and lease rates will climb, albeit at a slower pace than in the last two years.”

This is not to ignore certain deteriorating conditions. For example, the pace of new subleases entering the market is gaining momentum, although the amount of available sublease space is merely 0.6% of total inventory, Colliers points out. However, there’s been a 28.5% increase in that space being actively marketed over Q1 and a 117.2% increase year-over-year.

“The supply of sublease space will continue to rise due to deteriorating economic conditions and the ability of some tenants to sublet their excess space at a profit,” Colliers writes.

Meanwhile, other factors are giving the sector a boost. The US manufacturing revival will produce logistical advantages and promising prospects for businesses and investors, according to Colliers.

“The combination of robust government incentives and the sector’s rejuvenation will result in a mutually beneficial situation for occupants and investors, fostering economic growth and providing significant tailwinds for the industrial sector,” Colliers reported.

Colliers named Dallas-Fort Worth, Savannah, Chicago, Columbus, and Houston as the top five growth markets. Markets exhibited “exceptionally strong demand relative to their size,” based on absorption include Charleston, Columbia, Las Vegas, Richmond, Eastern Idaho, and Greenville/Spartanburg, alongside a few well-established markets such as Phoenix, Indianapolis, and Tampa Bay.

In Q2, the supply of projects under construction declined by 3.4% as an elevated interest rate environment prompted certain developers to halt their groundbreakings temporarily.

Absorption levels have begun to moderate as the supply-demand imbalance eases and the overall vacancy rate increased by 50 basis points and stands at 4.5%.

Top 25 markets with the lowest vacancies include Greater Los Angeles (2.1%), South Florida (2.9%), New York Metro (3.1%), Minneapolis-St. Paul (3.2%) and Portland (3.3%). The highest vacancy rates are in Indianapolis (8.0%), Dallas-Fort Worth (7.2%), and Milwaukee (6.8%). Average asking rents for warehouse/distribution space for Q2 increased by 26.1% year over year.

Source: GlobeSt