The industrial sector—which has been on a hot streak for several years—experienced a significant cooling-off in 2023. As we look ahead to 2024, CommercialEdge anticipates a period of stabilization and normalization in the sector.
In 2024, rent growth is expected to slow and vacancy rates to rise due to a surge in new supply. Although Mexico overtook China as the top U.S. trading partner in 2023, coastal port markets—particularly in Southern California—continued to lead in rent growth. While rent growth is expected to decrease in these markets in 2024, they are likely to remain at the top.
Despite a slowdown in new development, the long-term outlook for industrial real estate remains positive. Reshoring and nearshoring of manufacturing, increased construction spending and e-commerce’s lasting impact will drive future demand. Higher interest rates will reduce transaction activity, but a stabilized cost of capital may encourage investment in 2024. However, a significant increase in transaction volume is not expected this year.
A total of 462.9 million square feet of industrial space were underway in the U.S. at the end of 2023, amounting to 2.4 percent of total stock, CommercialEdge data shows. This marks a significant decrease from the peak of 742.3 million square feet in December 2022. The decline in new construction projects has been a result of ongoing deliveries and a slower rate of new project commencements compared to previous years.
This slowdown is seen as a positive development for the industry, as it helps prevent the risk of overbuilding. In the past two years, there were more than 500 million square feet of new industrial space delivered, which was historically high for the sector.
Developers kept active in the Phoenix market, where 42.4 million square feet of industrial space were underway as of the end of December. Dallas secured the second spot with a pipeline featuring 33.6 million square feet. Industrial investment in 2023 amounted to $52.1 billion, with properties trading at an average of $129 per square foot.
Industrial rents soar, Midwest lags behind
In December 2023, the national average in-place rents for industrial space stood at $7.70 per square foot, according to CommercialEdge data. This represented a significant 740-basis-point year-over-year increase, and a 10-cent uptick when compared to the previous month. Southern California stood out in the national rankings, showing substantial growth in rental rates over the past year. The Inland Empire experienced a notable surge in rents, recording a 14.9 percent increase.
In contrast, rent growth in the Midwest was sluggish, with Detroit (3.0 percent year-over-year growth), Chicago (3.8 percent) and Kansas City (3.9 percent) posting some of the smallest gains. While demand remained strong in these markets, the availability of ample land on the outskirts of the metropolitan areas allowed for a swift supply response, which limited the rent increases typically seen in port markets.
At the same time, the national industrial vacancy rate remained relatively stable, holding steady at 4.6 percent by the end of 2023. However, it’s worth noting that this rate had increased by 70 basis points from the beginning of the year due to the delivery of historic levels of new supply, coinciding with a cooling demand for space.