Industrial Deliveries Surge: Opportunities and Challenges for Tenants

In this article, you'll discover:

• The recent surge in industrial deliveries and the shifting market dynamics.
• Rising industrial vacancies and their impact on market conditions.
• High delivery volumes in key markets and their implications.
• Opportunities for tenants amid slower new construction and rising rents.

After years of nearly unstoppable growth, the industrial market may be starting to see a slowdown. Marked my deliveries hitting their peak, the landscape is shifting, and this brings both new concerns and opportunities for tenants.

Rise in Industrial Deliveries

For the past few months, the alarms had been sounded that 90% of the hundreds of millions of industrial square feet were to be delivered before 2024. Well, here we are approaching the year’s end, and the reckoning may be upon the warehouse market.

And all this new supply is coming as tenant-demand is reaching a plateau. Quarter-over-quarter absorption saw a decline of 12.9% which saw 46.2 million square feet of net industrial growth. In context, the pre-pandemic average is 17.5% higher with 211.6 million square feet.

The more modest industrial tenant interest is driven by several factors. First the whirlwind of growth it experienced was largely driven by e-commerce. Now with consumer spending expected to contract over the coming months, the online manufacturing boom may soften, pausing further expansion.

The slump in construction has been notable since before the second quarter, when it fell 12%. Because coupled with more modest tenant interest, elevated replacement costs and the unavailability of affordable financing discouraged developers from investing in speculative developments.

Rise in Industrial Vacancies

The vacancy rate has also been slowly and steadily climbing. Still below the ten-year average of 5.1%, Q3 of 2023 hit a vacancy rate of 4.7%. For reference, in Q1 of 2023, the vacancy rate was 3.8%.

And now as deliveries reach their peak and most speculative developments have screeched to a halt, many experts predict that this is a return to “normalized demand” levels from the historically low vacancy from the pandemic.

Because even though vacancies are rising, the overall industrial market is still doing fine, reflected by rent growth. This means prospective tenants have a lot of opportunities, if they are prepared. Enroll in our free video course below to learn everything warehouse tenants should know about finding the optimal space. 

Where are the Most Industrial Deliveries?

Dallas-Fort Worth has emerged as the most active market for industrial deliveries, boasting a substantial 32.1 million square feet of space. This figure nearly doubles the delivery activity seen in Phoenix, which holds the second spot with 17.4 million square feet.

This concentration of industrial deliveries in Dallas-Fort Worth underscores the region's significance as a prime logistics and distribution hub. The South has dominated the rest of the country with 47% of the year-to-date deliveries.

Another Texas city, Austin, continues to be one of the country’s most popular industrial cities. A surge in demand this year reflected by recent expansion from household names like Tesla and Samsung points to continued health in Texas throughout the next year. Learn about the other Top 5 Emerging Cities for Industrial Space.

The fact that certain markets are experiencing a high volume of industrial deliveries doesn't necessarily mean that vacancy rates will skyrocket. High delivery volumes could be indicative of strong demand in those markets. If demand matches or exceeds the supply of new industrial space, vacancy rates may not rise significantly.

Premium Warehouses are Worth the Cost

The industrial market is caught in a strange limbo because the red alarms have not truly been sounded yet because average rents continue to grow. Still, at the same time, developers are uninterested in entering the asset class until the economic conditions become more conducive.

A peek under the surface may find the Flight-to-Quality as the culprit for the continued rent growth. As businesses prioritize efficiency, advanced technology, and strategic location advantages, they are willing to pay more for buildings that meet these needs rather invest in the buildout and upgrade of existing facilities.

Emphasis on Class A properties has had a direct effect on average rental rates in the market. As anticipated, the average asking rates for leased warehouse spaces have experienced a notable increase because while there has been a dip in overall leasing activity, the higher concentration of leases being signed for Class A properties has driven up the average rental prices observed in the markets.

Certain features and amenities will garner more tenant interest, especially since the industrial market is so competitive, as companies race to fulfill last-mile and quick manufacturing expectations.

This also highlights how critical a strategic location is for commercial tenants. Since warehouse location highly affects delivery times, easy access to the predominant supply chain network continues to be a top concern for tenants. Read more about finding the right location for your warehouse.

What Should Industrial Tenants Know?

Commercial tenants find themselves in a unique position with both opportunities and challenges in the current real estate landscape. As new construction lags and decision-making processes get delayed, there is a window of opportunity for tenants to make the most of their lease negotiations over the next year. According to Prologis, "Customers are advised to take advantage because the rapid decline of new construction starts, and delayed decision-making could increase competition for space in 2024.”

Industrial tenants looking or new space can seize the current market conditions to lock in advantageous lease terms within the next year. This could involve gaining increased flexibility and concessions.

And on the other hand, as the newly developed warehouse space is absorbed by the market, rent growth is anticipated to slow significantly in response to the increased supply. This cycle is likely to persist until developers regain confidence and initiate new construction when demand catches up once again.

Tenants Should Stay on Top of Industrial Trends

It is critical for tenants to stay on top of trends that are influencing their industry. Not only can you capitalize on pockets of growth, but you can understand how your existing portfolio is positioned for success.

By adapting to the landscape, tenants can optimize their operations and maximize their competitive advantage. 

The industrial real estate sector is constantly evolving, and being aware of these hotspots can help businesses stay ahead of the competition and make informed decisions about leasing and investing. So, if you're ready to relocate or sign a new warehouse lease, do yourself a favor and work with a True Tenant Rep™.

With 30+ years of unbiased experience, the True Tenant Reps™ at iOptimize Realty® can save you time and money while maximizing the value of your tenancy to its fullest extent. Learn the tips and tricks we use to find and optimize the perfect industrial space in our free video course below.