Industrial growth will continue despite recent headwinds
The industrial real estate market, generally defined as manufacturing facilities; fulfillment centers; warehouses; last-mile logistics; and self-storage facilities, has seen an extended period of growth from 2019 through 2023 fueled by the incredible demand for online purchases driven by the pandemic. Over the past ten months, the industry has seen vacancy normalize and construction starts slow due to higher inflation and interest rates. Underneath that short-term reality, recent political policies such as the Inflation Reduction Act are working to boost US manufacturing through incentives to onshore and re-shore these job-producing facilities that should fuel momentum in the industry for years to come. Annualized manufacturing construction spending has increased 300 percent over the past three years reaching $233 billion in April 2024. This wave of spending has pushed the current manufacturing pipeline to 40 million square feet of space (msf) under construction – accounting for ten percent of all industrial space currently being built across the US.
Another short-term impact companies are facing is a rising vacancy rate in the sector which currently sits at 5.8 percent as of Q1 2024. This is a 200-basis-point increase over the same period in 2023. Robust construction completions are a major contributor to this, but we have seen a normalization of construction starts, allowing for absorption to catch up. Cushman & Wakefield is currently forecasting vacancy to top out at 6.6 percent before dropping back to around five percent. It is notable that five percent is below the long-term historical average, so this cycle is fundamentally different than prior cycles.
![Richard Jantz, LEEDAP PMP, is Executive Managing Director, Cushman & Wakefield Project and Development Services](https://construction-today.com/wp-content/uploads/sites/5/2024/07/Richard-Jantz.png)
An interesting shift in traditional key industrial markets is occurring with port disruptions in Baltimore after the Key
Bridge collapse, the unrest in the Suez Canal, and delays at the Panama Canal – each of which requires creativity and alternate logistics channels to avoid or lessen delays and interruptions.
An analysis of construction costs for completed projects has shown that economies of scale are providing savings on a cost-per-square-foot basis. Construction costs (exclusive of land) for a small project (109,000 square feet (sf)) is averaging $142 per sf reflecting a 17 percent increase year over year; a medium-sized project (475,000 sf) is averaging $85 per sf reflects a 2.1 percent increase year over year; and a large project (900,000 sf) is averaging $75 per sf yielding a 4.2 percent drop in pricing year over year.
While these averages indicate interesting trends, certain geographies saw much larger – or smaller swings – based on many of the factors identified above. Manufacturing firms have relocated industrial facilities to avoid sending large amounts of product across the ocean causing a significant increase in construction in Mexico City and Guadalajara where labor is quite competitive with available land. This enables trucking instead of shipping. A similar trend is occurring in Canada, however costs for labor and costs of importing materials are more expensive than seen in Mexico. US-based hot markets include Cincinnati, Cleveland, Houston and Denver, each seeing cost escalation at or above the averages. Markets with cost reductions greater than the average include Greensboro, Greenville, Chicago, and Montreal.
The fluctuations in markets are a complex mix of competition: the cost of labor in a particular market, commodity pricing, and inflation. The good news is that in many markets, costs continued to moderate in 2024. Lumber prices fell 1.4 percent, steel prices fell 8.4 percent, and copper prices fell 2.9 percent on a year-over-year basis. These savings were partially passed on to developers. It should be noted that there was an increase in concrete costs of 7.4 percent due to the closure of a major plant in Mexico tightening the national supply.
While e-commerce continues to increase as a percentage of sales, some of the pull-forward effect – firms building out sooner and faster during the pandemic – will weigh on the demand outlook through the first half of 2025. A slowly improving global growth picture is likely to lead to a rise in manufacturing activity, which will benefit industrial real estate heading into 2025 and beyond. This momentum of the consumers’ wallet and a resilient job market coupled with real income growth, should lead to steady consumption requiring continued growth in the industrial real estate and construction sector. Manufacturing should continue to drive a great deal of activity for industrial real estate, but it will be years before the impacts are fully seen based on the normal timeframe of business need to construction completion – generally three to four years. Once projects are delivered, we expect manufacturing employment to rise and supplemental firms to take root as well.
For a list of the sources used in this article, please contact the editor.
By Richard Jantz
Richard Jantz, LEEDAP PMP, is Executive Managing Director, Cushman & Wakefield Project and Development Services. Cushman & Wakefield is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in nearly 400 offices and 60 countries. In 2023, the firm reported revenue of $9.5 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services.