2024 Biannual Industrial Report: Part Three

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.

Free Rent Continues its Upward Climb, Now Increasing for 7 Consecutive Quarters for Bulk Transactions

The average share of lease terms allocated as free rent for industrial tenants has been steadily increasing since late 2022, with no signs of peaking. According to CompStak data, Q3 2024 recorded the highest free rent levels since 2019. In bulk transactions, the free rent ratio reached 3.7% of the average lease term in Q3 2024, 150 basis points above the 2019 average. This increase has been more pronounced in bulk deals, where the free rent ratio rose 150 basis points compared to a 60-basis-point rise in non-bulk transactions over the same period. The rising share of free rent can be partly attributed to shorter lease terms since the industrial sector’s peak. For example, in bulk transactions, the free rent period hit a low of 1.5 months in Q1 2023, when the average lease term exceeded 75 months. By Q3 2024, free rent periods had surged 56.1% from that low, while average lease terms declined by just 3.1%.

Annual Lease Escalations Stabilize for Long-Term Leases, Remaining Below Peak Levels

Despite broader softening in the industrial sector over the past two years, average annual lease escalations—the yearly rent increases in a lease—have shifted slower in tenants’ favor. While it has not moved as significantly as other concessions, such as free rent or greater term flexibility, escalations remain below peak levels for leases under and over five years. Notably, annual escalations have declined for four consecutive quarters in shorter-term leases but are stabilizing for leases of five years or more. This indicates landlords are holding firm on percentage increases, which remain well above 2019 levels, signaling confidence in long-term rent growth.

Renewing Tenants Face Steep Increases Despite Recent Rent Declines

Despite slowing rent growth over the past year, tenants renewing leases continue to face substantial rent increases. Among the ten largest renewals completed between Q2 and Q3 2024, rents rose an average of 61.1% compared to prior lease terms. These deals, spanning Los Angeles-Orange County-Inland Empire, Chicago, Atlanta, and Dallas-Fort Worth, reflect ongoing cost pressures for tenants.

The two largest rent increases occurred in Los Angeles-OC-IE, where Owens & Minor and iHerb faced rent hikes of 180% and 150%, respectively. Notably, these leases had the oldest prior execution dates in the dataset, indicating that tenants with older leases are more vulnerable to sharp rent spikes upon renewal. By contrast, the largest renewal by square footage saw only a 0.3% rent increase, likely because the previous lease was signed just last year. This underscores how slowing or reversing rent growth, particularly in Los Angeles-OC-IE, can temper increases for newer leases.

Logistics and Food & Beverage Tenants Drove Demand Behind Top Deals by Value in 2024

The rapid growth of e-commerce and logistics industries in recent years has significantly boosted demand for warehouse space. In 2024, nearly one-third of the top five industrial leases by value across major markets were signed by tenants in the logistics and distribution sector.

Western Post, a leading supply chain and logistics provider, emerged as a major player, securing two of the most valuable industrial leases in the Los Angeles market. Additionally, Western Post signed the highest-value lease in the Greater Philadelphia market between Q2 and Q3 2024.

The food and beverage industry also accounted for a substantial share of high-value deals in 2024, ranking as the second most active tenant industry in this analysis. Companies in this sector signed eight of the top five leases by total consideration across these six markets. Among them, Mondelez International, one of the world’s largest snack producers, inked two of the most significant leases, including the highest-value lease in Dallas-Fort Worth.

Over 27% of Industrial Space Leases Expire by 2026, with 2025 Expirations Averaging Below Market Rents in Most Markets

2026 is a peak year for industrial lease expirations, with 15.4% of all leased square footage set to expire from 2025 onward. By the end of 2025, another 12.1% will expire. CompStak data shows that the average execution dates for leases expiring in 2025 across eight major markets range from Q4 2019 (Philadelphia and Phoenix) to Q2 2022 (Houston), predating the peak of the current industrial rent cycle.
As a result, most 2025 expirations are paying rents significantly below current market averages. In Q3 2024, tenants in these markets are negotiating renewals with substantial increases despite some recent rent softening. For example, in the Philadelphia-Central PA-DE market, tenants with Q4 2019 leases are paying an average of $5.53 per square foot with annual escalations of 2.53%. The current market starting rent of $10.74 per square foot is 75.7% higher than what these tenants currently pay. Other spreads range from 30.9% to 49.3%, with the only market whose expiring tenants paying close to current starting rents for this set of expirations being Chicago.

Tenant Spotlight: Western Post’s 2024 Leasing Surges Over 500%, Reaching Six-Year High

Across all national markets, Western Post’s total industrial leased square footage in 2024 is now up 509.7% over 2023 and the highest in at least six years, thanks to five deals signed this year in three major markets. Western Post added millions of square feet to its industrial footprint in the Los Angeles-Orange-Inland, Philadelphia-Central PA-DE-So. NJ, and Chicago Metro markets. Prologis, the nation’s largest industrial landlord, was the landlord in three of the largest industrial leases signed by the bulk logistics provider in 2024. Leasing activity in 2024 showcased a significant increase in average transaction size, rising 143.9% compared to 2023 levels.

Not only did Western Post expand its footprint nationally, but it also leased space below the average starting rent in Los Angeles-OC-Inland, Philadelphia, and Chicago metro markets. Of those three, the highest starting rent was in Los Angeles, where Western Post signed at an average of $11.44 per square foot, 24.9% below that market’s average. That rate is slightly higher than Western Post’s average starting rent nationwide in 2024 of $11.08 per square foot, which also represents the largest year-over-year increase since 2021.