The nation’s industrial market showed continued signs of slowing in the third quarter, extending a two-year cooling period following its pandemic boom. However, analysts suggest that the market may be nearing its bottom.
Preliminary data from Savills reveals that the U.S. industrial vacancy rate reached 7.4% in Q3, marking a 350-basis-point increase from two years ago and representing the highest vacancy rate in a decade.
Mark Russo, vice president of industrial research at Savills, highlighted that the national industrial market has seen the fastest rise in vacancy rates in history. This increase follows rapid growth during the Covid-19 pandemic and a subsequent cooling period as tenant needs shifted.
In Q3, sublease availability surged to a record 198.7 million square feet, a 45% increase from last year. However, growth has slowed, with an 8.8% rise this quarter compared to an average of 20.1% last year.
“The changes we’ve experienced are a significant shock to the system, affecting rents and tenant-landlord dynamics,” Russo said. He believes the market is nearing a plateau in vacancy and sublease availability.
Russo expects more industrial firms to finalize real estate decisions after the November election, as they assess the incoming administration’s policies.
New construction has declined sharply, with Q3 starts at their lowest since 2016. As of Q3, 309.3 million square feet of industrial space was under construction, the lowest since late 2018, according to Cushman & Wakefield PLC.
Despite a general downturn in leasing activity, 139.6 million square feet of leases were signed in Q3, 8% above the pre-pandemic 10-year average and nearly equal to last year’s total of 140.9 million square feet.
While the national industrial market has been slowing for several quarters, some areas are seeing sharper declines.
Mark Russo noted that previously hot markets like Phoenix, Dallas, and smaller cities such as Austin, Savannah, and Charleston are now facing double-digit vacancy rates. “High-growth markets tend to fall the hardest,” he said. “It will take time to absorb the excess supply.”
Southern California, a key industrial hub due to its proximity to major ports, experienced a downturn earlier than others, with rents dropping 15% to 20%. Although still higher than pre-pandemic levels, the market is adjusting after rapid growth.
Despite increased vacancies and declining rents, the Inland Empire saw significant activity in Q3, with large tenants like Western Post, Campbell’s, and eFulfillment Services occupying substantial spaces.
According to Cushman & Wakefield, eight markets reported double-digit vacancy rates in Q3: Phoenix (12.7%), San Antonio (12.3%), Charleston (11.9%), Birmingham (11.7%), Austin (11.3%), Indianapolis (11.1%), Greenville (10.9%), and El Paso (10.1%).
