Industrial Absorption Set To Grow on Rate Drop Expectations

Industrial net absorption for the second half of 2024 is expected to reach approximately 114 million square feet, up from 67.1 million square feet absorbed during the first half of the year.

First-quarter absorption was down substantially from its historic peak in 2021 when it totaled 749.3 million square feet for the year, according to CoStar data. It also lagged absorption recorded in the same period last year of 172.2 million square feet.

Absorption in 2025 is expected to be around 249 million square feet, and the figure in the first half of 2026 could be about 154 million square feet, according to the NAIOP Industrial Space Demand Forecast. The forecast assumes a soft landing of interest rates. If a hard landing materializes, net absorption could significantly underperform the forecast, said NAIOP.

With interest rates expected to start coming down over the next month, potential industry leasing activity going forward is substantial. High interest rates are a headwind to developers and investors as well as industrial space occupiers, the report noted.

In addition, retail sales remained strong in July, which drives the need for industrial space, and inventory levels have remained steady year over year.

Recent growth in demand for industrial space can be attributed to the resumed expansion of e-commerce, which reached 15.9% of total retail sales in the first quarter of 2024, up from 14.9% the prior year, said NAIOP. Notably, Amazon is once again expanding its logistics footprint with a significant increase in leasing and acquisition activity. E-commerce requires more space than traditional brick-and-mortar retail and its continued growth should support increased demand for industrial space, even if total retailer and wholesaler inventories remain unchanged, the report said.

As new industrial supply has hit the market, vacancy has risen slightly to 5.9% from 4.2% during the second quarter of 2023. However, asking rents have grown 4.3% year-over-year, consistent with a relatively healthy market, said NAIOP.

It expects rents to continue to grow, particularly in the South, which has absorbed 53.7 million square feet of industrial space. In every other region, completions outpaced absorption, driving vacancies to 6.5%, the report found.