Too much construction? That could be the industrial market’s top challenge today

Too much supply? That might be the big challenge facing the industrial sector today, according to the latest research from Crexi.

As Crexi says in its first quarter 2024 National CRE Trends Report, the e-commerce boom and an increased focus on reshoring to help strength supply chains led to an industrial building boom during the first half of the COVID-19 pandemic.

And that building boom left the industrial market with so much space that this formerly red-hot sector is finally starting to show some weakness.

As Crexi says in its first-quarter report, the demand for industrial space soared during the last cycle, leading to stiff competition for existing warehouses and manufacturing sites. This demand surged particularly during the COVID-19 pandemic. You can blame part of this on consumers who wanted products delivered quickly during the pandemic, and companies realizing that their just-in-time approach wasn’t going to work when consumers across the country flocked to online shopping.

While the U.S. office market struggled mightily during the pandemic, along with the retail and hospitalization sectors, industrial thrived. Crexi pointed to average absorption rates in 2021 that doubled that of the previous five years. In 2022, industrial absorption rates were 60% higher than the five years prior to 2021.

To address a shortfall of space in the face of this surging demand, companies scheduled a record-breaking wave of construction that was to begin at the end of 2023, despite certain markets experiencing ultra-low vacancies and robust rent growth across the U.S. This has led to a tapering off of the sector’s fundamentals, with an abundance of supply eating into the high-velocity rent growth that the industrial sector had seen for so long.

Crexi’s report isn’t all bad news, though. It’s not even mostly bad. That’s because despite construction hurdles, such as high costs, supply chain issues and protracted delivery timelines, the U.S. industrial sector benefits from a long-term positive outlook, thanks to e-commerce’s gains, healthy consumer spending and continued onshoring incentives.

Some of the industrial sector’s metrics remain solid, too, according to Crexi’s research.

The average industrial asking rent per square foot for new industrial listings stood at a solid $11.27 in the first quarter of 2024. That is up slightly from the fourth quarter of last year, when this figure stood at an average of $11.11 and is up from the average of $11.01 a square foot in the first quarter of 2023.

And what about sales? Crexi reported that the median sold cap rate stood at 7.1% for industrial sales that closed in the first quarter of 2024. That is down from 7.5% in the fourth quarter of last year and up from 6.3% in the first quarter of 2023.

Crexi reported that Houston recorded the highest average cap rate for industrial assets in the first quarter of the year at 8.18%. San Diego had the highest average asking industrial rent in the first quarter at $15.51 a square foot. And Los Angeles saw the highest average industrial price in the first quarter of 2024 at $431.42 a square foot.