At first glance, Q2 2024 saw little change to recent U.S. industrial market conditions, which have been gradually shifting more in tenants’ favor since the beginning of 2023 as available industrial space accumulated in growing numbers. In Q2 2024, ~100 million square feet of new industrial developments finished construction, which equates to three times more than the level of tenant demand growth in the same quarter. Net absorption increased for the first time since Q4 2022, however was still relatively low at 30 million square feet, the lowest second quarter calculation since 2012.

New supply of industrial space has been increasingly outpacing demand, resulting in the U.S. industrial vacancy rate rising by 30 basis points to 6.5%, which is uncomfortable territory for landlords of large logistic developments, which encompass most of the recent speculative construction. Asking rents increased 4% nationwide over the last 12 months, still, rent growth remained essentially unchanged during Q2 2024.

However, after more than 15 months of softening demand, U.S. industrial leasing rebounded modestly, during spring and summer 2024, signaling that the sector’s post-pandemic slowdown may be beginning to ease. Inflation-adjusted spending on retail goods typically stored in distribution centers, increased by more than 1% in Q2. Consumer spending on goods is increasing as more items are flowing into the U.S. and moving through distribution centers to meet demand. In turn, industrial leasing jumped in the second quarter of 2024, driven primarily by improvements in these economic drivers. New industrial leases singed during Q2 increased 12% compared to the second quarter of 2023.

Older Distribution Centers Lose Out to Newer Competition

On its own, the recent increase in new leasing activity doesn’t necessarily mean that tenants signing these deals are expanding their overall industrial footprint. Like many office users, distribution firms and manufacturers are simply upgrading to newer facilities. Net absorption has remained positive over the past several months but slowed to the lowest level in more than a decade as many tenants leasing newly built distribution centers are also closing older facilities. Large logistic properties built in the 1970s, 1980s, 1990s and early 2000s have all lost occupancy over the past two years. On a percentage basis, the largest declines occurred in properties built between 1990 and 2010. Once top-of-the-line properties 10 to 20 years ago, now upon their lease expiration, tenants are opting to leave and expand into more-efficient distribution centers with higher ceiling heights that were mostly built during the record development boom in the past five years.



Source: CoStar News

Industrial/Flex: Fort Collins, Loveland & Larimer County

Source: CoStar

Industrial/Flex: Greeley & Weld County

Source: CoStar

Deal Flow Shows Signs of Revival

The turbulence of 2023, driven by soaring interest rates in the third quarter and deepening recession fears in the fourth, has cast a long shadow over the market. Many sellers, wary of the economic uncertainty, hesitated to test the waters, holding back assets that might have otherwise hit the market. As a result, transaction volume remained flat and bypassed its usual year-end surge but as 2024 progresses, the tide seems to be turning. Sales of single-tenant, triple-net-leased properties increased for the first time in two years in Q2 2024. Sales rose 10.6% to $2 billion from the previous quarter. This increase was driven by sales of single-tenant industrial properties.

As 2024 enters its final stretch, the focus remains on the Federal Reserve and the potential for interest rate cuts. Should the current trend hold, with third-quarter volumes surpassing those of the second, the market could be on the brink of resurgence. The recent slump in transaction volumes could soon be a thing of the past as the commercial real estate sector regains momentum in deal flow, even as uncertainly around pricing persists.

Source: CoStar News

The Bright Spot of Commercial Real Estate - Data Centers

Data centers have become a highly profitable real estate asset, with over 2,800 in the U.S.- the demand for these critical infrastructure facilities have skyrocketed. As key infrastructure for the digital economy, they support technologies like cloud computing and AI. The rising demand for data centers is driving up land values, particularly near power grid access points, which are essential for their operation. As digital services expand, the demand for data centers will continue to grow, solidifying them as a valuable real estate asset class.

The U.S. colocation data center market has seen outsize growth, with the size of the market doubling in four years. Yet vacancy is at a new record low of 3%. Occupancy has increased at a 30% compound annual growth rate (CAGR) since 2020. Meta announced in July that it’s in the process of building an $800 million data center at the High Plains Business Park, south of Cheyenne, WY. In August, it was reported that Google will spend over $1 billion in Texas this year alone to meet demand for its various data centers. Microsoft recently filed a permit to construct a one-level, 244,676 SF data center in Castroville, TX. The building is expected to cost Microsoft $482.6 million to construct and construction is anticipated to begin in Q2 2026, with completion for Q1 2028.

Source: CoStar News, The Registry, JLL

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