A recently released report by national commercial real estate brokerage firm Colliers predicts that the industrial market will begin to return to proper balance this year with construction activity down, but asking rents and build-to-suit development projects higher.

“Following two years of white-hot demand for industrial space, supply and demand fell out of balance during 2023. Developers completed a record 607 million square feet of new supply, nearly triple the year’s net absorption total of 231 million square feet. That absorption total is 54% lower than absorption in 2022, although it’s in line with pre-pandemic levels of demand,” the report stated.

As a result of the record-level of activity, vacancy rates increased in each quarter of 2023 in every region and in nearly all of the 77 industrial markets Colliers tracks. The U.S. average vacancy rate increased by 194 basis points over the year to 5.55%—the highest since the second quarter of 2016.

According to the report, authored by Colliers’ Craig Hurvitz Director, National Industrial Research, and Stephanie Rodriguez National Director, Industrial Services, the New York Metro region had an inventory of 884 million square feet and saw its vacancy rate rise 183 basis points to 4.7%.

In terms of new supply and its impact on the industrial market, Colliers noted in its report that demand as measured by net absorption totaled 231 million square feet in 2023—a 54% drop from 2022, but still above 2019’s pre-pandemic total of 219 million square feet. Colliers predicts that the gap between new supply and demand will narrow during 2024 as construction completions fall off and demand holds steady or builds slowly as the year progresses.

Meanwhile, average net rents grew by 12% year-over-year during 2023. Rent growth slowed during the second half of the year following several quarters of unprecedented increases exceeding 15% year-over-year. Rents are much higher, exceeding $20.00 per square foot net, in several in-demand coastal markets.

The report noted that average net rents exceeded $10.00-per-square-foot for the first time in 2023, and are forecast to gradually climb higher during the next three years at a pace more consistent with the historical average of around 5%.

Orange County Market Continues Maturation in 2024

Conor Eckert, Senior Development Officer and Vice President of Business Attraction for the Orange County Partnership, said the county’s industrial vacancy rate generally has hovered between 5.0% to 5.5%. Inventory of new Class-A space is constrained, given the interest rate environment. This constraint, combined with solid tenant activity has led to rent growth in the market, he noted.

He said for new industrial building product, the average asking rent has been north of $13-per-square-foot NNN and Eckert believes that Orange County will see some deals signed at rents closer to $14-per-square-foot NNN in 2024. “Orange County is a mature, proven market that boasts powerful fundamentals,” Eckert said.

Entering 2024, there is a number of projects that are set to break ground this year in Orange County totaling approximately 1.3 million square feet of industrial space.

Key Trends Heading into 2024

Among the highlights of Colliers’ forecast for economic conditions and the performance of the industrial markets in 2024 were:

• “While economic growth is expected to slow during 2024, the strength of the labor market, moderating inflation, and a quicker pivot from the Federal Reserve have resulted in cautious optimism and less concern for a recession.

• While GDP grew by an estimated 2.5% over the 12 months of 2023, it expanded at a 3.3% pace year-over-year during the fourth quarter of 2023. Moreover, many economists forecast GDP to continue to grow in 2024.

• The U.S. industrial market typically lags behind the overall economy and also had a slowdown in demand in 2023. Net absorption, which averaged 137 million square feet per quarter during 2021 and 2022, is forecast to hold at between 40 million square feet and 60 million square feet per quarter during 2024 based on pre-pandemic levels of demand, anticipated build-to-suit completions, and economic indicators.

• As construction starts remain limited, new supply will fall off during each quarter of 2024, resulting in supply and demand returning to equilibrium by the end of the year.

• As a result, the U.S. industrial vacancy rate is forecast to increase by another 110 basis points during 2024, eventually stabilizing at around 6.6% towards the end of the year. Vacancy will climb higher in markets where significant speculative development is still underway, exceeding 10% in some markets.

• Build-to-suit development is projected to pick up during 2024 as the 10-year speculative construction cycle winds down. Manufacturing construction spending reached a new high in 2023, largely due to reshoring and the CHIPS Act, and it will continue to expand in 2024.”