Dive brief:
- After a four-year boom fueled by high consumer demand during the pandemic, industrial construction starts, which include warehouses and distribution centers, have slowed sharply.
- New construction starts fell more than 40% between 2022 and 2023, with 341.9 million square feet breaking ground last year. This pipeline slowdown has continued into the early stages of 2024, resulting in a “significant slowdown compared to previous quarters,” according to Santa Barbara, Calif.-based real estate software provider CommercialEdge.
- this the trend will continue for the rest of this year, according to a recent industrial construction report from Chicago commercial real estate services firm Cushman & Wakefield, despite a boom in manufacturing construction, another component of the industrial sector.
Diving knowledge:
The rapid expansion of industrial facilities during the pandemic has now outstripped the current needs of occupiers, resulting in increased vacancy rates and ultimately a more cautious approach by developers.
While industrial construction activity has slowed and will remain moderate throughout the year, the slowdown should not particularly affect manufacturing construction, which also falls under Cushman & Wakefield’s industrial category, according to Jason Price, senior director of US industrial sector research at Cushman & Wakefield.
Instead, Price said “the slowdown is primarily in the warehouse and distribution sector,” while “manufacturing construction has been relatively stable.”
However, many contractors remain optimistic about the long-term outlook for the manufacturing sector a recent drop in construction activity. In fact, general contractors in the space insist they don’t feel a downturn and are still anticipating one acceleration of activity short term.
But that’s not the feeling warehouse and distribution projectsPrice said.
This is because, along with normalizing demand in the industrial market, rising interest rates, tighter standards for construction loans and general economic uncertainty have led to starts falling off a cliff for warehouse and distribution projects, according to a CommercialEdge report.
Since 2020, 1.8 billion square feet of industrial space has been delivered in the US, which is more than the entire previous decade, according to Cushman & Wakefield.
After an overstimulated economy drove consumer demand for durable goods to record levels in 2021 and 2022, developers built industrial facilities at a brisk pace to meet occupier demand amid historically low unemployment rates.
Now, occupier demand has faded, leaving just over half of the square footage built in 2023 still available for rent, sending vacancy rates back up across the country, according to the Cushman & Wakefield report.
However, despite a massive drop from its recent peak, the industrial construction pipeline remains above long-term averages.
This means the window of opportunity for occupiers may be short-lived, as many markets are expected to see a resurgence in demand by 2025 and new supply will be absorbed more quickly than in the past 18 months, according to Cushman & Wakefield.
“Deliveries will fall in the coming years due to barriers to entry, higher construction costs and developers holding back on new projects until market fundamentals and the lending environment improve,” according to the report from Cushman & Wakefield. “However, as supply slows and as leasing intensifies along with declining vacancy rates, rental rate growth in most markets is expected to moderate increase”.
