Industrial Markets Are All About the New Supply

Stories about construction and oversupply affecting rents and vacancy rates have largely been around multifamily. According to a new Colliers report, those forces also affect industrial and logistics.

Perhaps it’s been overlooked because the industrial category has been doing far better than any other part of commercial real estate. However, better is relative and there will still be implications from market and macroeconomic conditions.

The study was done about the largest 25 U.S. industrial markets. Out of the 77 markets that Colliers tracks, these 25 represent 76% of the total industrial base across the total markets.

Industrial was, with multifamily, one of the two darling property types during the pandemic. Investors badly wanted to invest, prices rose, cap rates fell, and many people thought it would go on forever.

Inflation swept in, financing rates went up, and still over the last two years, as financing cost were very touchy, the amount of new supply still increased. According to Colliers, over the last eight quarters, record new supply pushed vacancy rates higher in the top 25 markets. The year-over-year increase averaged 202 basis points, climbing to 6.4%. Just over two-thirds of the total delivered supply was in the top markets. Still, in the other 52 markets, vacancy was even higher at 6.6%.

But in the past year, properties under construction dropped by half. New supply fell by 18% year over year in the biggest markets. The decline happened faster than in the overall industrial markets. In the second quarter of 2024 alone, the amount under construction was 225.2 million square feet, a drop of 49.8%. Colliers says it’s an indication that recovery in the top 25 will likely be faster than the remaining markets.

Remember that new supply falling isn’t the same as supply falling. It’s still been growing, with the top 25 industrial markets seeing 3% year-over-year growth, which is 14.0 billion square feet. Compare that to the other 55 markets with an increase of 4.6 billion square feet or 4.0% growth.

Phoenix had the greatest inventory growth at 11.5% year over year. That was an additional 43.4 million square feet. In terms of raw space counts, Dallas-Fort Worth saw an increase of 6.3% annually, which was the second-largest increase by that measure.

By raw square footage, Dallas-Fort Worth had the biggest growth at 64.3 million square feet. Atlanta was second with 44.4 million square feet. Phoenix’s 43.4 million square feet was third. Fourth was Houston at 38.6 million square feet. Chicago was sixth with 34.2 million square feet and Greater Los Angeles was 33.5 square feet.

After that, figures fell sharply. Philadelphia came in behind the others at 18.2 square feet. The average across all the metro areas that Colliers looked at was 16.3 million square feet.