During the height of the pandemic, skyrocketing ecommerce activity created skyrocketing demand for fulfillment centers around the United States. As a result, vacancy rates for industrial real estate fell below 1% in key markets. Developers and investors went all-in on speculative projects as they tried to keep pace with growing demand.

Then, in 2023, the economy took a negative turn, and consumers pulled back on their spending. The national vacancy rate for industrial properties hit 5.2% at the end of 2023 as retailers got rid of pandemic-era safety stock, optimized inventory levels, and reevaluated their storage needs. The delivery of more than 600 million square feet of new industrial real estate inventory in 2023 also rapidly changed the landscape and pushed the vacancy rate upward.

Many stakeholders in the real estate industry responded to these events with something near panic, citing statistics like the 40% drop in net absorption in mid-2023 as a reason to worry. “Slowdown” became the common term for industrial real estate’s fall from pandemic-era glory. High interest rates further complicated matters heading into 2024, making it difficult for companies to seek new space.

Industrial Real Estate: The Reality

Months of gloom-and-doom headlines about industrial real estate have overstated the severity of the current decline in activity. Here are three reasons why industrial real estate stakeholders need not worry about the current lull:

1. A rebalancing was always going to happen

The global COVID-19 pandemic was a Black Swan event. By their nature, Black Swan events (and their fallout) cannot be predicted. The massive spike in ecommerce demand from Americans stuck at home artificially inflated demand beyond anything anyone could have expected. Industrial real estate was arguably one of the greatest benefactors of the pandemic era, but that level of demand and activity was always unsustainable.

Instead of using year-over-year data and watching numbers tumble down from pandemic highs, consider the long-term trends. While a vacancy rate hovering around 5% seems terrible compared to 2022 or 2021 data, that number is still comfortably below the 15-year average of 8%. The reality is that the market isn’t falling so much as it is rebalancing to normal levels.

2. The manufacturing renaissance is finally happening

While the unprecedented demand for warehouses has waned, demand for manufacturing sites is rising. Supply chain disruptions during the pandemic showed companies the risks of overseas production, driving increased interest in reshoring production assets and suppliers.

Additionally, the U.S. government acted to lure manufacturers back to the United States with the Inflation Reduction Act, the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act (IIJA), which all offer various incentives for certain types of manufacturers who establish operations on U.S. soil. As a result, manufacturers are driving increased demand for industrial real estate as they seek advanced factories that can handle the stringent power and connectivity requirements of modern manufacturing technologies.

3. Things will turn around in 2024

Long-term projections for industrial real estate look good, meaning the so-called slowdown will be short-lived. New construction starts tapered off at the beginning of 2024, so the vacancy rate should start to come down again later this year without so much new inventory flooding the market. Slowing inflation should also cause interest rates to drop, making financing more cost-effective for businesses looking to expand industrial operations. As factors like these improve, the industrial real estate market will only benefit.

If you need industrial space but find current market conditions intimidating, working with an experienced broker like Phoenix Investors can help you find the space you need with minimal risk.

About Phoenix Investors

Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.