The Future of the US Industrial Market: Trends and Growth Potential

In this article, you'll learn:

• The impact of rising interest rates and reduced spending on industrial space demand.
• The role of onshoring and nearshoring in driving industrial market growth.
• Key regions like Texas and Arizona leading in new industrial construction.
• The continued resilience of the industrial market despite economic fluctuations.

As we leave 2023's dynamic economic climate, the industrial real estate market emerges as a leading performer in CRE, bound to an upswing in demand for industrial spaces.

The pandemic fueled a surge in the market through e-commerce, which has since moderated as consumer spending declined. This shift coincides with a more cautious approach among investors and developers, a response to the impact of rising interest rates that have subdued new construction activities.

Still, the industrial market will live to see the gains of another day as industrial space is boosted by other evolving trends that seek to improve the efficiency of our supply chains. Read on to learn about where the future of the U.S. industrial market is going.

Industrial Sector Slowdown

The economic conditions of the last few months have driven tenants to adopt a far more methodological approach to acquiring industrial space.

First, rising interest rates have quelled the growth of new construction. This has been a notable trend since the third quarter, where quarter-over-quarter net absorption saw a decline of 12.9%. Elevated replacement costs and the unavailability of affordable financing discouraged investing in speculative developments. Experts are saying that...

However, in context, this relative slowdown makes sense. Consumer demand for e-commerce during the pandemic caused unprecedented interest in industrial assets. Record levels of online shopping caused economic growth to be heavily concentrated in online retailers and their supply chains. Industrial development sped up to keep up with the exploding demand.

So, on the other hand, a pullback is perhaps a natural sequence following a dip in consumer spending that has persisted through the second half of 2023.

Now, as deliveries surge and businesses adopt a more cautious approach to their industrial real estate, construction has significantly tightened.

The end of 2023 marks the completion of a whopping 90% of the industrial construction projects to be completed. So to avoid an oversaturation of the market (on top of high interest rates), developers have slowed production. This has also prevented rents from dropping in accordance with a persistent influx of industrial inventory.

So, will 2024 see developers breaking ground once again? Well, new construction will probably be stalled until industrial rents rise or interest rates flatten out. This is also when the transaction volume will likely regain speed.

But until then, the sector isn't doing too shabby. The vacancy rate remains healthy as the headwinds of
e-commerce continue. Economic analysis also points to other trends that will play integral roles in the growth of new supply.

Stay on top of any and all trends in industrial real estate.

Increased Pressure on Industrial Supply Chains

Beyond the emphasis on industrial efficiency to accommodate consumer spending, the industrial real estate market is still feeling the evolving effects of the pandemic in other ways.

Americans now understand how vulnerable the vast majority of our supply chains are. Geopolitical factors, trade tensions, and disruptions caused by events like the pandemic have highlighted the risks associated with relying heavily on overseas production.

So to prevent similar crises, the American government has placed emphasis on supporting national manufacturing facilities. One of the biggest initiatives was the passing of the CHIPS and Science Act last year. With it, the White House promised to devote $52 billion to the expansion of the US’ science and technology center. The goal is to boost the global prowess of the United States’ competitive tech status.

And part of this initiative involves decentralizing the country’s reliance on other global powerhouses like China. Such legislation has encouraged investors to focus on increasing the inventory of properties on U.S. soil.

Thus, onshoring and nearshoring have emerged as powerful and more common solutions that will influence the industrial market.

Industrial Market Growth Due to Onshoring

Onshoring is very attractive to investors and industrial manufacturers. It offers improved supply chain resilience, reduced shipping costs, faster turnaround times, better quality control, and the ability to tap into local talent and innovation. It also quells the uncertainty of navigating trade in a time of political unrest and how it influences the price of key features like fuel.

Of course, industrial spaces, including warehouses, factories, and distribution centers, play a critical role in providing the necessary infrastructure and operational capabilities.

As companies increasingly opt to onshore their operations, the demand for industrial space is experiencing a notable surge, driven by the need for suitable facilities to accommodate:

• Manufacturing processes
• Storage of raw materials and finished goods
• Distribution networks
• Other related activities

But of course, as always, there are also regional factors at play. Demand in the industrial market is expected to notably spike in certain areas rather than ripple throughout the whole nation. We aren't only witnessing the rise of onshoring; nearshoring is becoming more common, displacing the reliance on countries like China for closer locations in North America.

And because of this shift, there has been heightened demand not only in the primary nearshoring locations but also in nearby states like Texas and Arizona. The South itself has dominated the rest of the country with 47% of the year-to-date deliveries. Within Texas, Dallas-Fort Worth and Austin emerge as standouts.

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.

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. Learn more about the other top cities for manufacturing space. 

This concentration of industrial deliveries underscores the region's significance as a prime logistics and distribution hub. Future construction may be heavily concentrated in these regions rather than locations like the east coast.

So new supply is highly entwined with the prospect of improving the reliability of our national supply chains. Evolving demand for industrial space is also tied to manufacturing and the ongoing goal of expanding our industries.

Tenant Demand Remains Healthy

The industrial real estate market has showcased resilience.  Despite economic fluctuations, there has been a surge in demand, driven by the e-commerce boom. However, factors like reduced consumer spending and rising interest rates have led to a moderation in growth and a slowdown in new construction. However, the sector maintains a healthy vacancy rate, and new factors promise the continued growth of the field for the foreseeable future. This also means there will be more of a safety net for tenants. 

According to GlobeSt, "Increasingly globalized nature of supply chains and the rise of secondary markets in these strategies and experts are quite confident that industrial will continue to be a top asset class for commercial real estate." 

Trends like onshoring and nearshoring, aimed at strengthening national manufacturing, have fueled increased demand for industrial properties throughout the country, but with strongholds in specific regions. While the market shows signs of stabilizing, its robustness persists, indicating a potential plateau in new space demand while rental rates continue to hold promise for sustained growth. This means it's more important than ever for tenants to understand what forces are shaping the demand for space.

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