Industrial On Track to Deliver Weakest Q1 Performance in a Decade

Industrial is feeling a big pinch in the first quarter of 2024. The period isn’t over, so the final figures aren’t in, but according to data from CoStar Group, if the current data trend continues, US industrial net absorption will see the weakest Q1 performance in over a decade.

Demand is so far off that even with the relative low inventory of industrial, compared to other property types, there isn’t enough demand to snap up open space. And the last 10 years includes 2023, which has been notorious for its year-over-year transaction falloff.

A number of factors are pushing the lack of absorption, according to CoStar. Third-party logistics companies that had beefed up demand early in the pandemic. There was outsized demand from e-commerce, home delivery, and a need to store general inventory when it finally came out from damaged supply chains. But as things have normalized, they’ve needed less space and have been closing extra distribution centers and putting them up for sublease.

A number of major retailers, feeling economic pressures, have also closed distribution centers. Home Goods closed a 1.2 million square foot distribution center in Ohio during the fourth quarter of 2023, putting it up for sublease. During the first quarter of 2024, Home Depot closed two large distribution centers. Big single-tenant centers typically need to go to similarly sized companies, as restructuring them into multi-tenancy facilities is costly and challenging.

Among smaller businesses, there’s been a lack of construction of the types of facilities for them, blue-collar in particular. Therefore, there’s also limited space available for absorption, and it gets leased out quickly.

“The gap in space availability rates between small-bay and big-box industrial properties is at the widest levels CoStar has ever recorded as completions of new industrial developments continue to drive up availability in the big-box category but have had little impact easing the space shortage that smaller tenants face,” they wrote.

The good news for industrial is that it has remained relatively strong.

In the latest Beige Book, the Federal Reserve wrote, “Commercial real estate activity was weak, particularly for office space, although there were reports of robust demand for new data centers, industrial and manufacturing spaces, and large infrastructure projects.”

DoubleLine noted in a recent report that industrial benefited from a leap in e-commerce during the pandemic. That sudden jump has eased, but only back to what was an ongoing robust growth curve. Next-day delivery expectations continue among consumers. Increased onshoring of manufacturing and an interest in more diversified supply chains also support strengths going forward.

Given that industrial is expected to remain resilient this year, demand is still there, suggesting that there eventually will be an upsurge in building and eventually inventory. But that might have to wait until there is some relaxation in interest rates.

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