The nation’s industrial real estate market is cooling off in the face of slowing demand and higher borrowing costs, but the market remains fundamentally healthy, according to the second-quarter report released Thursday by research and services firm Cushman & Wakefield (NYSE: CWK)

The vacancy rate, which has been ticking up for several quarters, rose to 4.1% in the second quarter. This is the first time since mid-2021 it had reached that level, and it was spurred by large volumes of supply delivered into the market. Still, vacancies remain 110 basis points below the 10-year average of 5.2%, according to Chicago-based Cushman data, which showed 24 markets currently register vacancy rates of 3% or lower.

With construction completions outpacing demand through the second half of 2023 and 2024, vacancies will surpass 5% in 2024 as the industrial market rebalances to more sustainable levels, the report said. When compared to the 15-year average of 6.6%, vacancies will remain historically tight.

Nationwide, rents will trend higher, albeit at a modest pace, Cushman said. Rents will increase by 10% to 11% in 2023 — moderating from high-teens nosebleed levels. New top-tier construction in well-located geographies will continue to garner rents well above the market averages.

There were 20 markets that posted rent increases of 5% or more in the second quarter, Cushman said. “While market conditions have begun to soften, many landlords — especially institutional owners — are holding firm on pricing.” 

In the second quarter, net absorption, the amount of space occupied minus space vacated, registered 44.9 million square feet, down from 71.4 million square feet in the prior quarter and 126 million square feet in the year-earlier period. Absorption levels in the first half were roughly on par with the pre-pandemic period, which were historically strong cycles for absorption but not off-the-charts numbers seen in the immediate wake of the pandemic.

The South accounted for 61% of the quarter’s absorption total, led by Savannah, Georgia, Dallas and Houston. All three markets achieved more than 3 million square feet of net absorption, according to Cushman data. “In total, 21 markets posted at least 1 million square feet of net absorption growth, signaling that although moderating from historic highs, the industrial market is still very healthy.” 

Leasing activity is also showing signs of cooling off, Cushman said. In the second quarter, gross new leasing registered 141.1 million square feet, down 8.9% from the first quarter. Second-quarter activity was on par with the quarterly average of 139.8 million square feet reported between 2015 and 2019. Activity in Columbus, Ohio, Charlotte, North Carolina,  Baltimore and Denver doubled first-quarter totals.

About 20% of the 83 markets tracked by the company posted leasing totals of 3 million square feet or higher, said Cushman. Dallas/Fort Worth led the way with 11 million square feet leased; it was the only market to top 10 million square feet.

Slowing consumer demand and higher borrowing costs are taking their toll on construction activity, Cushman said. Construction starts fell for the third straight quarter and are down 31.4% from the end of 2022. The industrial construction pipeline dropped 5.1% quarter over quarter to 624.3 million square feet and is down 91 million square feet from its peak in the third quarter of 2022.

“Given slowing demand, developers are beginning to tap the brakes on future projects,” the report said.

The post Industrial real estate cools but remains healthy  appeared first on FreightWaves.

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