Industrial real estate square footage under construction in the third quarter fell 43% from the previous year, the largest drop since 2008, new data from Cushman & Wakefield shows.
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The amount of industrial real estate under construction in Q3 totaled 309M SF, demonstrating continued decline in new building since the e-commerce boom early in the pandemic, The Wall Street Journal reported. The amount of warehouse space under construction has fallen every quarter since it peaked at about 720M SF in Q2 2022, according to Cushman & Wakefield data.
That industrial demand frenzy was exemplified by an unprecedented number of leases of 1M SF or more in 2022, when there were 63 such deals in the U.S. There were 43 in 2023, according to CBRE.
Data indicates industrial real estate vacancy is also on the rise, increasing to 6.4% in the third quarter, up from 4.6% a year earlier.
Although industrial demand began to normalize in 2023, elevated supply continued to deliver, giving tenants the upper hand after years of no leverage.
Warehouse vacancy reached its highest level since 2020 in Q4 2023. That quarter also marked the second-highest quarterly construction completion on record, helping push the vacancy rate past 5% for the first time since the onset of the pandemic.
“You have softer market conditions. It’s taking longer for some of these projects, when they deliver, to lease up,” Jason Price, head of logistics and industrial research at Cushman & Wakefield, told the WSJ. “There’s not this rush to get something built right away.”
Jobs are falling alongside flagging consumer demand as well. Companies don’t need as much space to store e-commerce inventory, and a pandemic-era high of more than 1.9 million storage and distribution jobs in May 2022 has now fallen by 171,600 jobs, the WSJ reported, citing Bureau of Labor Statistics data. Warehouse operators saw 11,000 fewer jobs in September than August.
Now that industrial starts have fallen so dramatically, vacancy could begin to diminish as the development wave ebbs further. Fewer construction starts are in the cards after the current pipeline delivers, Price told the WSJ.
“We should start having that inflection point at some point next year, and supply and demand come into more balance,” he said.
Meanwhile, some industrial real estate owners and developers have shifted their focus to building specialized data centers to help meet demand stemming from the artificial intelligence boom.
Panattoni Development Co., a private developer of more than 610M SF whose industrial clients include Amazon, UPS and Unilever, is now developing data centers, the WSJ reported.
“You want to be where the customer is, and right now the customer wants to be in the data center world,” said Doug Roberts, president of Panattoni’s North American development group.
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