Net Absorption of 1M-SF Industrial Segment Posts Improvement

Even as industrial vacancy has increased to 6.1% over the past year and a half, completions may fall short of long-term demand in most markets during the months ahead, according to Marcus & Millichap’s latest quarterly report on the national industrial sector.

The report’s optimism about future space demand is based on increased requirements as companies adopt automation and robotics. In addition, the growth of e-commerce sales, which rose 1.1% in 1H 2024 compared to the same period in 2023, drove increased leasing activity.

“The 1 million square-foot-plus segment was the only property size tranche to post an improvement to net absorption over the year ended in June,” it stated.

Over 35% of new industrial construction underway consists of massive facilities of one million SF or more – the kind of newer and higher-tech facilities tenants frequently favor as they adopt automation and robotics, the report commented.

At the same time, facilities of 10,000 to 50,000 SF had the lowest vacancy rate of any category midway through the year and also saw their highest number of trades in 10 years. Absorption, however, was down in both categories.

“As of June, roughly 92 percent of the manufacturing space under construction already had a tenant in place,” the report noted. “These dynamics position most metros to observe upticks in manufacturing demand for older, sub-250,000 square foot properties, influencing some owners to upgrade existing facilities to attract prospective tenants.”

The report cited a 3% year-over-year increase in asking rents. “More high-end supply additions pull the average asking rate up to $10.86 per square foot in 2024. The gain caps off a 46 percent jump over the last half-decade, the largest of the four major commercial property types.” Indeed, rents rose year-over-year for all property sizes and all industry types.

The report acknowledged that inventory has grown by 1.7%, but said this was the slowest pace since 2016. Industrial supply has been boosted by 3.5% to 629 million SF through new deliveries, with 20% of that targeted to five major metros: Atlanta, Dallas-Fort Worth, Houston, Riverside-San Bernardino and Phoenix. These cities accommodate 27 percent of the still-vacant supply delivered over the five years, with 108 million SF more to be added in 2024. However, 31 other major metros have a total inventory of just 129 million SF, suggesting they could recover in time, the report said.

The report noted that the industrial sector was least affected among all CRE types by a slowdown in investment sales, and predicted it would regain momentum after 2024. Lower interest rates and less new supply entering the market could help stimulate rent growth. The report predicted the industrial sector’s long-term leases, limited move-out risk and access to federal grants and tax breaks would encourage lenders, with manufacturing and R&D sites prioritized.