By Adrian Ponsen CoStar Analytics
The combined occupancy rate for all U.S. industrial properties dropped further in recent months as vacant distribution centers complete construction faster than tenants can lease them. Rent growth has slowed in most markets, with property owners increase concessions such as offering periods of free rent to lease large spaces.
But not all industrial property markets are following this trend. Beginning early last year, the number of industrial markets with rising occupancy rates began to increase again for the first time in more than three years.
As of the fourth quarter of last year, the number of markets where industrial occupancy rates are increasing has risen for four straight quarters, encompassing 39 of the 100 largest U.S. markets at the end of 2024. One year ago, the roster consisted mostly of smaller cities such as Hartford, Connecticut, and Wichita, Kansas.
Over the past year, occupancy has begun to rise in several more prominent markets. During the fourth quarter, occupancy rates increased in four of the 10 largest U.S. industrial markets: Detroit, Houston, Philadelphia and California’s Inland Empire.
Occupancy rates for industrial property also rose in several smaller, but still prominent logistics hubs used for distributing goods nationally and regionally including Cincinnati, Ohio, Louisville, Kentucky, Reno, Nevada, Harrisburg and Scranton, Pennsylvania, and Savannah, Georgia.
While not a flawless predictor, in the past changes in the percentage of markets with increasing occupancy rates have served as leading indicator of key turning points in the national industrial occupancy rate.
During mid-2009, the percentage of U.S. markets with increasing occupancy rates began to rise 15 months before the overall U.S. industrial occupancy rate began to recover. During late 2021, as record levels of speculative development began to overwhelm leasing in certain markets, the percentage of U.S. markets with improving occupancy rates began to fall 12 months before the U.S. industrial occupancy rate began to decline.
The big five
Whether the national occupancy rate begins to ascend in 2025 depends in large part on what transpires in the nation’s five largest industrial markets: Chicago, Dallas-Fort Worth, Los Angeles, New York City and Atlanta. Together, these markets account for almost one-fifth of the U.S. industrial property stock, and none had occupancy rates that had started to rise last quarter. However, even a modest pickup in economic conditions and industrial leasing would be enough to increase occupancy rates in most of these markets this year.
In Atlanta and Chicago, the amount of unleased industrial space that is currently under construction is at the lowest levels recorded since 2015, meaning occupancy rates in these markets will face limited supply pressure from completions of speculative projects this year.
Setting aside the data centers and manufacturing facilities now underway in Dallas-Fort Worth, most of which are preleased, that market currently has 18.8 million square feet of logistics space under construction. This is less than two million square feet short of the net expansion in occupied logistics space within the market last year, meaning declining vacancy in the local industrial market is well within reach by late 2025 if tenant demand accelerates.
At 12.5 million square feet, the New York City market’s current tally of logistics space under construction more than doubles the 5 million-square-foot net expansion in occupied logistics space that the market recorded last year. This signals that New York is less likely to achieve a rising occupancy rate next year although a turnaround is still possible, given the more limited tally of projects that will likely still be under construction late in the year.
Los Angeles has been a laggard in terms of demand for industrial space for more than two years and local leasing would need to pick up significantly for occupancies to rise in 2025. However, combined import traffic at the ports of LA and Long Beach increased by 21% in 2024 with its strongest showing in the second half of the year. This signals that a leasing and vacancy recovery is far from impossible, particularly with the limited tally of speculative space under construction.
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