Industrial's Tenant-Favorable Dynamic May Not Last Long
Savills sees potentially lower supply and possibly lower vacancy rates by late 2024.
A drop-off in construction starts means the current tenant-favorable dynamics may not last long, according to a report from Savills, which reported that quarterly construction starts in Q3 2023 were down 72% from the peak observed in Q2 2022.
This will result in lower supply and possibly lower vacancy rates by late 2024, according to report author Mark Russo, who is head of Industrial Research.
Despite this pullback, 602.1 million square feet of construction projects are underway across the US and the vast majority comprises speculative (spec) product, the bulk of which has yet to secure a tenant, Savills said.
Savills called the volume of new deliveries for 2024 is “expected to remain historically high” for most of the year.
The largest pipeline is in Dallas-Fort Worth, followed by Phoenix and Atlanta.
The pipeline overall is giving tenants greater options “and flexibility and pre-leasing is becoming less common with the rising availability of newly delivered space,” Savills said.
The firm projected that build-to-suits should make up a larger share of construction activity in the near term.
“This is by no means a market in distress, with national vacancy still at a healthy 5.4% and long-term demand drivers intact,” Russo said. “The market was sorely in need of new product up to modern specifications, and the new inventory is expected to be absorbed steadily.”