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U.S. Industrial Leasing Plunges In Q1 As 'Recalibration' Continues

Industrial users in the U.S. slammed the brakes on leasing in the first quarter, deepening a slowdown that is likely to continue for the remainder of the year.

Net absorption reached 28M SF nationwide in Q1, a roughly 70% drop from a year earlier, driving the vacancy rate up to 6.7% from 4.5% last year. But industrial brokers aren’t worried. In fact, they realize their position could be viewed as enviable.

“A breather, a recalibration period, a soft landing — any or all of the above terms are appropriate,” Newmark National Industrial Research Managing Director Lisa DeNight said. “In the first quarter, we had around 28M SF of net absorption across the country. The office market would love to see that.”


For industrial, which spent several years on a meteoric rise, a decline that would devastate some other segments of CRE is more of a return to a manageable pace, although there is a hefty pipeline of new development that needs to be leased.

“The market is still generally healthy, but the big problem in terms of vacancy moving so quickly is the excess amount of supply that has been delivered over the last two years of the industrial market: 1.2B SF,” Savills Vice President of Industrial Research Mark Russo said. “That's bigger than the size of the whole Chicago industrial market, which is a huge market.”

That supply glut is causing major industrial landlords like Prologis to slow their development plans, according to the company’s first-quarter earnings call Wednesday. The REIT will knock its initial development guidance of between $3B and $3.5B worth of starts to between $2.5B and $3B.

Overall, development has dropped. As of Q1, some 462.1M SF of industrial space was under construction, according to Savills, down from 782.1M SF a year earlier but higher than the pre-pandemic 400M SF. 

Prologis also reduced its guidance around cash flow in anticipation of slower leasing velocity this year.

But along with its smaller compatriots Rexford Industrial and First Industrial, which also released Q1 earnings Wednesday, Prologis reported healthy revenue growth, beating analyst expectations.

These mixed results are indicative of a market that is still performing well but is no longer operating at the dramatically inflated level brought on by the pandemic.

So far this year, DeNight said there have been 20 “megabox” leases, or those over 700K SF. She said that represents upward movement since the last half of 2023 for that particular kind of demand, but not a return to the pandemic boom.

“We've already seen the bottoming out of new leasing activity in the fourth quarter of last year,” DeNight said. “It was pretty much at its nadir. Since then, we've been encouraged by the reemergence of large requirements.”


One user in the market for big chunks of industrial space is a familiar name.

“Amazon is in the market for some larger requirements,” DeNight said. “The shareholder letter that the CEO issued last week expresses some of the strategies for this year that would feed into that, and e-commerce in general is the strongest driver of those larger leases.”

The e-commerce giant seems to be at least partially reversing course on its 2022 strategy to reduce industrial usage, including by expanding its collection of same-day fulfillment centers nationwide.

The online retailer will use its same-day fulfillment centers for delivery of perishable groceries and other goods, CEO Andy Jassy wrote in the letter to shareholders. The company has 58 of these same-day delivery sites in the largest U.S. metros and plans to double that count.

On the whole, e-commerce sales made up 15.6% of total U.S. retail sales by the end of 2023, according to the Census Bureau, down from the pandemic peak but still up steadily compared to pre-pandemic years. That total is forecast to grow to 16.6% this year and 20.6% by 2027, USA Today reports, citing online platform Oblero data.

Industrial property returns are expected to drop by 2% this year compared to last, according to the National Council of Real Estate Investment Fiduciaries, but will bounce back in 2025 with an increase of 5% for that year and another increase of 7% in 2026.

Investors will continue to be interested, according to Newmark. Closed-ended funds' dry powder totaled $259B at the end of 2023, the company reported, down 8% since a year earlier. Investors are still mostly interested in residential and industrial, with an estimated 78% of that capital targeting those kinds of assets.

The overhang of industrial space has meant a pause in rent increases and slight drops in some markets, according to Savills.

Nationally, asking rents are nevertheless higher than a year ago. As of Q1, asking rents averaged $9.47 per SF, up from $8.67 per SF a year earlier and considerably higher than the 2019 and 2020 pre-pandemic averages of just above $6 per SF.

In Southern California, rents dropped in Q1, the first time that has happened since the Global Financial Crisis in 2009, according to Savills. The decline was slight, less than 15 cents per SF in Los Angeles and the Inland Empire, which is roughly what happened in 2009.

There will continue to be downward pressure on rents this year as the lowered pace of demand eats away at the elevated amount of supply, but slowly, Russo said.

“The market is still reasonably healthy,” he said. “But tenants are starting to realize they definitely have some leverage now.”

Related Topics: Prologis, Savills, Newmark