2024 Biannual Industrial Report: Part Two

CompStak’s 2024 Biannual Industrial Report uncovers the latest trends shaping the industrial real estate market. From surging e-commerce demand and shifting trade dynamics to evolving lease structures and rent adjustments, this report provides a comprehensive look at the forces driving the sector. Dive into key insights on port activity, tenant behaviors, and market performance through Q3 2024.

Interested in the full report? Find it here.

E-Commerce Poised to Hit New All-Time High, Reaching 16.2% of Total Retail Sales in Q3 2024, Just Shy of Q2 2020’s Peak

In October 2024, real retail and food service sales (adjusted for inflation) edged up just 0.3% year-over-year, marking a modest rebound after six consecutive months of flat or negative growth. Despite this tepid overall performance, e-commerce continues to gain traction. In Q3 2024, e-commerce’s share of total retail sales increased for the ninth consecutive month, narrowing to within 20 basis points of its all-time high set in Q2 2020. Since the U.S. Census Bureau began tracking this data annually in 2000, Q4 has consistently recorded the highest share of e-commerce sales annually, with the exceptions of 2020 and 2021.

Future China Tariffs Could Challenge U.S. Industrial Sector Long-Term but Spur Short-Term Demand as Importers Stock Up

Anticipated tariff increases under the second Trump administration may drive a surge in U.S. imports from China, with import volumes already having reached their highest levels since 2022 in September 2024.  This acceleration mirrors trends from 2018 when businesses stockpiled goods to avoid higher costs. For the industrial commercial real estate sector, this could lead to increased short-term demand for warehouse and distribution space as importers seek to store inventory. However, prolonged trade tensions may also encourage diversification of supply chains and shift demand in ways less beneficial for the industrial sector in the longer term.

Average Lease Lengths Stabilize but Remain Below 2022 Peak

Since early to mid-2022, the average length of industrial lease terms across major markets has experienced a steady decline. Initially, this trend may have been driven by landlords favoring shorter terms to avoid locking in long-term rents at potentially below-market levels. More recently, however, the decline in lease lengths likely reflects a softening market, as both landlords and tenants prioritize greater flexibility. The reduction in lease lengths has been more pronounced in bulk transactions (leases of 100,000 square feet or more). By the third quarter of 2024, the average lease length for bulk transactions had fallen 9.7% from its 2022 peak, compared to an 8% decline for transactions under 100,000 square feet.

Class A Lease Transaction Sizes Drop Over 25% from Post-COVID Peak

Class A industrial leases have seen the sharpest decline in transaction size since their post-COVID peak in Q4 2022, while Class B/C leases experienced a smaller drop over the same period. Mega-users favoring bulk transactions in newer Class A buildings have retreated in recent quarters, contributing to the decline in Class A transaction sizes across major markets.

Effective and Starting Rent Recent Declines for Bulk Transactions Exceed Non-Bulk Deals

Across major markets, the industrial sector slowdown has driven declines in both starting and effective rents over the past year for bulk transactions and deals under 100,000 square feet. Effective rents have fallen more sharply than starting rents, signaling that landlords are not only increasing concessions but also negotiating more aggressively on face rents (initial rents in a transaction’s early term).

For bulk transactions, effective rents have dropped an average of 1.9% from their Q4 2023 peak to the average over the last four quarters, compared to a 1.0% decline for non-bulk deals during the same period. While rents remain below peak levels, the declines have shown signs of stabilizing as of Q3 2023. However, potential challenges, such as supply chain disruptions or shifts in import volumes, could disrupt this trend.