Industrial Supply Wave Shifts Industrial to Stabilization
The Pandemic’s Lingering Effects on the Industrial Segment
During the COVID-19 pandemic, lockdowns and restrictions meant that consumers spent significantly more time at home, leading to a surge in the reliance on e-commerce to obtain goods. As a result, e-commerce saw unprecedented growth, with global online sales increasing by 27% in 2020 alone, marking one of the sharpest yearly upticks in history. This growth spurred distributors to rethink their sales strategies, with as many as 84% of them projecting a shift to selling 100% of their product online in the future to align with changing consumer behaviors.
To keep up with this demand, distributors embarked on an aggressive expansion of industrial facilities, including warehouses, fulfillment centers, and distribution hubs, aimed at faster last-mile delivery and reduced supply chain lag. Since 2020, over 1.8 billion square feet of industrial construction was added across the U.S., a record-breaking figure that doubled the average industrial space delivered in the years preceding the pandemic.
However, post-pandemic demand dynamics shifted, and the intense growth in e-commerce moderated as consumers returned to in-person shopping and supply chain issues began to stabilize. This deceleration in demand led to a cooling of industrial real estate activity, resulting in an uptick in vacancy rates. The industrial sector now faces the challenge of filling these vacant spaces that were catalyzed by the pandemic-driven e-commerce boom.
Industrial Properties Adjust to New Supply
The surge in new industrial facilities built during the pandemic caused an oversupply, outpacing demand and keeping vacancy rates high. By year-end 2024, the national industrial vacancy rate reached 6.9%. This metric rose for nine consecutive quarters, with a 30-basis-point average increase month-over-month.
Tampa noted one of the highest vacancy rates nationally as it reached 5.6% at the end of Q3 2024—a level not seen in the market in over eight years. The significant influx of new supply in Tampa outstripped absorption, with a notable -1.2 million square feet in absorption recorded during Q2 2024 alone.
Across the country, San Diego was also heavily impacted by the supply flood. At the end of Q3 2024, the market’s industrial segment noted a 10-year high vacancy rate of 7.6%, driven by a significant uptick in speculative construction and sublet space. Around 2 million square feet remains up for lease due to the new supply additions. Leasing activity for industrial facilities here is not expected to pick back up until the second half of 2025.
Construction Costs Contribute to Industrial Environment
To balance the absorption rate of new industrial properties and adjust for softer demand post-pandemic, construction starts have decreased significantly across the U.S. From 2022 to 2023, construction starts fell by more than 40%, with 341.9 million square feet breaking ground in 2023. At the end of Q3 2024, industrial square footage underway fell 43% from 2023. Only 90 million square feet of industrial space was delivered during Q3 2024, the lowest level of deliveries since Q2 2020, when completions totaled 86.9 million square feet.
Increased construction costs were a contributing factor to the decrease in industrial developments as well. As of March 2024, construction pricing grew 2.6% on a year-over-year basis; at the same time, building costs jumped by 3.8%. The pricing for smaller-sized projects increased the most across the country, growing by 17% over 2023 costs and now averaging $142 per square foot.
The Denver market was strongly affected by the increase in construction costs. It currently stands as one of the most expensive cities to fund medium- and large-sized industrial developments. This pricing pressure, along with the abundance of new supply over the past decade, contributed to Denver’s vacancy rate of 7.6% at the end of Q3 2024, which is among the highest industrial vacancy rates nationally. Together with economic uncertainties, these factors contributed to a significant slowdown of new developments, allowing vacancy rates to normalize in the quarters ahead. With that said, smaller properties here have seen the highest level of absorption, with around half of new leases signed over the past year involving properties under 100,000 square feet.
Sales Remain Stable as New Construction Underway
Other West Coast markets have been instrumental in sustaining transaction velocity—particularly in California, which noted increased sales compared to other regions in the country. Los Angeles, specifically, ranked third nationally for sales volume as the market noted more than $2 billion in transactions over the past 12 months. Logistics-focused properties—including warehouse and distribution, plus flex buildings—have been pivotal, with these properties trading at $330 and $400 per square foot, respectively. Following this trend, the largest sale for Los Angeles in 2024 was a warehouse facility that sold for $86 million, or $426 per square foot.
Although developments across the U.S. decelerated compared to the pandemic peak, construction activity is still high compared to historical standards. By the end of 2024, about 195.8 million square feet will be delivered, aligning with the pre-pandemic construction levels seen in 2019.
Phoenix is a market that stands out nationally for its active industrial development pipeline. Since 2021, around 90 million square feet of industrial space has been added to the metro, and an additional 36.8 million square feet is currently under construction. The new additions make Phoenix the most active market for industrial activity across the country. Many of the projects cater to larger properties that are greater than 100,000 square feet. This trend contributes to the vacancy rate for industrial facilities in this category reaching 14.8% by Q3 2024.
Looking Ahead to Industrial Balance
E-commerce demand is on the rise again, with $288.8 billion in online sales occurring in Q3 2024, a 2.2% uptick from Q2 2024. This marks the seventh consecutive quarter of increased activity, translating to a sustained need for additional square footage for warehousing, distribution centers, and last-mile delivery facilities. The increase in sales activity for e-commerce will contribute to absorption metrics moving forward.
Similar to Amazon’s pandemic-era expansion, where the company secured large industrial spaces to meet growing demand, Amazon has recently leased over 1 million square feet across California and Arizona, pushing absorption levels up more than 30% compared to 2023. In line with this growth, Amazon has increased its warehousing and storage workforce, adding 10,700 employees in July 2024. This hiring boost parallels the spike in employment seen when Amazon expanded its footprint during the pandemic, signaling that the e-commerce resurgence is driving both square footage demand and employment in the industrial sector.
Data Companies Aid Industrial Activity
Beyond e-commerce, data center demand is also aiding industrial absorption, driven by the growth in artificial intelligence (AI). For example, in June 2024, OpenAI announced that it would rent out a space in Abilene, Texas that would be capable of delivering up to one gigawatt of power by 2026. Phoenix is set to benefit from similar data center growth, with data centers comprising 18% of the existing industrial market inventory. Stream Data Centers is developing four new facilities in Goodyear, adding 403,000 square feet by August 2025. This expansion is anticipated to boost absorption rates, reducing vacancy in the Phoenix industrial market and strengthening its position as a key data center hub.
Another Texas market that has seen increased industrial absorption is Dallas-Fort Worth. Since 2020, big bomber industrial properties made their way into the metro, and now make up 118 facilities. These sites are over 500,000 square feet, and are favorable because of their long-term leasing capabilities. Google is one tenant that was enticed by these spaces in the metro. Over the last six months, the firm took up more than 2 million square feet in two leases.
Apart from recent trends boosting leasing demand for industrial spaces, construction activity is expected to taper by mid-2025, which should begin to balance leasing activity with the supply wave left over from recent years. New addition activity nationally was noted at 147 million square feet during the second half of 2023 and has continued to fall since then. By the end of 2025, industrial construction is expected to note a 10-year low.
