Vacancy rate for industrial real estate exceeds 5% mark for first time in 12 quarters

The industrial vacancy rate for commercial real estate in the fourth quarter of 2023 surpassed the 5% mark for the first time since the third quarter of 2020, thanks to muted demand and a healthy rate of speculative construction completions, according to a report from real estate firm Cushman & Wakefield.

Specifically, the industrial vacancy rate ticked higher by 60 basis points (bps) to 5.2% for Q4. But the market is still tight; despite finally breaking through the 5% barrier again, the number still remains 120 basis points below the long-term 15-year average of 6.4%.

The firm's definition of industrial real estate includes the categories of: warehouse/distribution, manufacturing, flex, and office services (office space servicing/within industrial space).

One main driver of the trend was rapid construction of additional building space, as new deliveries totaled 156.3 million square feet (msf) in the fourth quarter, down 9.8% from the record high achieved in Q3 (173.2 msf). This was the second-highest completion total on record, fueled mainly by vacant, speculative deliveries across all four regions of the country. This also marked just the fourth time in history the U.S. delivered more than 150 msf quarterly. For the year, there were 609.6 msf of new industrial product delivered nationwide, surpassing the previous record in 2022 by 17.6%.

At the same time, overall net absorption—rentals of that new space—remained muted in Q4 with 41.1 msf of space absorbed, down from the 52.5 msf recorded in Q3.  Year-to-date (YTD) net absorption finished at 224.3 msf, which is in line with the pre-pandemic 10-year average (2010-2019) of 224.8 msf.

“As expected, amid the backdrop of rising vacancies coupled with tempered demand, asking rental growth continued to slow in Q4,” Jason Price, Head of Logistics & Industrial Research at Cushman & Wakefield, said in a release. “On a quarterly basis, the U.S. overall industrial rental rate ticked higher by 0.5%, down from 1.1% the previous quarter.  On an annual basis, rent growth moderated to 10%, the fifth straight quarter in which the annual rent growth rate declined. We expect rent growth throughout most of the country to continue to slow in 2024 as we previously forecast.”