Average warehouse vacancy rates in the U.S. rose to 5.2% in the fourth quarter of 2023 with 156M SF of new space becoming available, another sign the formerly red-hot sector has chilled from its pandemic heights.

Q4 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, The Wall Street Journal reported, citing a new Cushman & Wakefield report.

Normalized demand began meeting supply last year, giving tenants the upper hand after years of no leverage, Savills Senior Director and Head of Industrial Research Mark Russo told Bisnow in October.

E-commerce sales spiked in mid-2020 as people adjusted their behaviors to more frequent online shopping from home. Online sales accounted for 12% of retail sales at the beginning of 2020 and 17% of retail sales by the end, the U.S. Census Bureau reported.

High demand kicked off a significant expansion in warehouse construction and leasing. Amazon doubled the size of its fulfillment network in two years as its business surged, the WSJ reported.

The demand drove the industrial vacancy rate down to 3% in late 2022, and some markets, including Southern California, were effectively full. Developers built more than 2B SF of storage and distribution space in four years, according to the WSJ.

By October 2023, however, industrial absorption in the U.S. had declined about 50% year-over-year, per Savills data.

“While the new development pipeline has exceeded demand, we are clearly seeing signs that construction is slowing in response to market conditions and tempered absorption totals,” Jason Price, head of logistics and industrial research at Cushman & Wakefield, told the WSJ.

The supply pipeline will likely outpace demand throughout 2024 as projects that already broke ground deliver, but current groundbreakings are relatively rare.

Retailers have delayed leasing decisions over the past 18 months amid rising interest rates, shifting consumer spending and uncertainty about the economy, the WSJ reported. This led some developers to pare back building plans amid weakened demand.

Companies signed new leases for about 588M SF of warehouse space in 2023, down 27% from the year before, according to the Cushman & Wakefield report. Yet, the vacancy rate is still low by historical standards, the WSJ article states, citing a 4.7% vacancy rate at the end of 2019 and a 15-year average of 6.4%.

The industrial market began returning to normal, or “back to 2019,” in mid-2023, Prologis CEO Hamid Moghadam said.

But demand remains strong in industrial hubs like Houston, eastern Pennsylvania and Southern California, according to the WSJ article.

Companies are still leasing enough space to keep rents climbing. The average asking rent rose 10% year-over-year in the fourth quarter to $9.79 per SF, the Q4 report states.