Here is the second part of our two-part article about industrial market. In this article, we break down rents in each region. (Click here to see Part I.)
Regional Breakdown
West
Rents declined in several markets over the past year due to oversupply and slowing demand, pushing up vacancy rates and forcing landlords to lower rents to attract tenants. The steepest drops occurred in the Inland Empire, Calif., and Las Vegas, which had seen rapid growth in 2022 and 2023, according to Colliers.
Phoenix exemplifies this trend. The market has seen an uptick in vacancies due to aggressive development pipelines. More than 22 million s.f. is currently under construction, representing 5% of its total inventory, according to Kidder Mathews.
Occupancy rates are not keeping pace with deliveries, prompting predictions that future construction will be scaled back to stabilize vacancies.
E-commerce remains a key driver of industrial demand with 3PL providers increasingly leading new space requirements as retailers and wholesalers outsource distribution to enhance flexibility, preserve capital and focus on core operations.
South
The South recorded the highest regional vacancy rate, at 8.6%, according to Colliers. While markets like Dallas/Fort Worth saw strong absorption, others experienced speculative builds and rapid expansion, with new deliveries outpacing demand.
Interestingly, rents in the South increased the most, averaging 5.1% year-over-year. This contradiction may be explained by:
- Landlords maintaining high asking rents to preserve property valuations, offering incentives such as free rent periods instead of lowering rates.
- Premium rents for newer, well-located, high-efficiency Class A buildings, which continue to attract tenants and push up average rents.
- Rising development costs being passed on to tenants through higher rents, even amid soft demand.
Midwest
The Midwest maintained the lowest vacancy rate, at 5.4%, thanks to more conservative development strategies. BTS projects tailored to specific tenants dominated, with markets like Chicago, Columbus, Ohio, and Kansas City seeing steady absorption and fewer speculative builds, according to Colliers.
East
In New York City, government agencies led industrial leasing in Q2, accounting for 46.5% of activity, according to JLL.
The largest lease was the NYC Department of Transportation’s 212,000-s.f. deal in a Long Island City building it had already occupied. The Port Authority of New York and New Jersey followed with an 83,000-s.f. lease at a recently renovated Morgan Stanley asset near JFK Airport.
About half of the city’s vacancy consists of Class A new construction, prompting developers to take more aggressive steps to stabilize assets. Proposed zoning changes and macroeconomic challenges have slowed new development, with only one speculative groundbreaking expected over the next two years.
In New Jersey, industrial continues to dominate transaction volume over office and retail, according to NAIDB.
“The Northern and Central New Jersey industrial market continues to lead in transaction volume, highlighting its strong appeal to both users and investors as a core logistics and distribution hub,” said David A. Simon, COO at NAIDB.
The largest deal was a 600,000-s.f. warehouse sale in Middlesex County, totaling $166.8M. Prologis acquired the property from ARC Realty for logistics use.
Another notable sale was the Cottontail Logistics Center, also in Middlesex County, which sold for $84M. The high price skewed the median for buildings over 100,000 s.f. to $282 per s.f.
