2024 Biannual Industrial Report: Part One

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 reached a near-record high of 16.2% of total retail sales in Q3 2024, continuing its nine-month growth streak and highlighting persistent demand for industrial logistics spaces.

TEU volumes at major U.S. ports increased significantly year over year, with Long Beach and Los Angeles up 22.9% and the Port of New York/New Jersey up 11.7% year-over-year through Q3 2024, signaling continued demand expected from the logistics sector.

Possible tariff increases under the new administration could temporarily boost U.S. imports and drive short-term warehouse demand as businesses stockpile goods. Prolonged trade tensions, however, may spur supply chain diversification, with long-term impacts on the industrial sector yet to be seen.

Over 27% of industrial leases will expire by 2026, with 2025 expirations averaging rents up to 75.7% below current market rates in some areas. This could lead to substantial rent hikes for tenants renewing leases in most major markets.

Effective rents across major markets for bulk industrial transactions have fallen 1.9% from their Q4 2023 peak, outpacing the 1.0% decline for non-bulk deals. This signals rising concessions and more flexible negotiations in a softening industrial market, though rent declines appear to be stabilizing as of Q3 2024.

Industrial lease terms have shortened significantly, with bulk transactions seeing a 9.7% decline in length since 2022. Simultaneously, free rent periods have risen for seven consecutive quarters, reaching their highest levels since 2019, reflecting a shift toward greater tenant flexibility in a softening market.

U.S. Transportation & Warehousing Employment Climbs for Six Straight Months through October 2024

U.S. manufacturing employment fell sharply following both the Great Financial Crisis and the onset of the COVID-19 pandemic. As of October 2024, it has recovered, rising 12.7% from its low in April 2020, though it remains 0.7% below its most recent peak in January 2024. Transportation and warehousing employment has trended differently and is now up 61.1% from its respective low reached in December 2009 but now down 0.5% from its most recent peak reached in July 2022. While the number of manufacturing jobs still exceeds those in transportation and warehousing, the gap has narrowed over time. At the onset of the Great Financial Crisis, there were three manufacturing jobs for every single transportation and warehousing job. By October 2019, this ratio had narrowed to 2.2 and has since declined further to 1.9 as of October 2024.

U.S. Port Volumes Through Q3 Up Year-Over-Year Nationwide, with Significant Gains at West Coast Ports

Through Q3, major ports across the United States have reported higher total volumes compared to the same period last year, with the largest year-over-year increases at the ports of Long Beach (18.8%) and Los Angeles (18.4%). Both ports experienced three consecutive months of rising TEU volumes before a decline in September 2024. Meanwhile, the Port of New York and New Jersey posted a 13.8% year-to-date volume increase compared to last year, but volumes declined for two consecutive months through September 2024, possibly in anticipation of a strike in early October 2024. The International Longshoremen’s Association is scheduled to renegotiate a new deal in January 2025, which could impact East Coast ports and markets in early 2025.

Industrial Vacancy Rate Rises for Seventh Consecutive Quarter, Reaching 3.1%

In NCREIF’s property index, the industrial vacancy rate continued its steady climb, reflecting ongoing challenges in the sector that are also evident in the broader market. While it has now reached the same level as in the second quarter of 2020, this property set has performed better than the broader market, where some outlets are reporting that the overall nationwide vacancy rates are at a ten-year high.

Supply Chain Index Fell below 0 in October Indicating Limited Pressure After Major Port Strike Averted

Changes in the New York Federal Reserve’s Global Supply Chain Pressure Index are associated with goods and producer price changes in the United States and are used to gauge the importance of supply chain constraints. Positive values imply supply chains are under pressure, whereas negative values imply supply chains are functioning well. The GSCPI fell to -0.32 in October, down from a positive value of 0.11 in September, indicating limited disruptions or pressure. However, an upcoming renewed port negotiation in January and the implementation of increased tariffs in a new Trump administration could be headwinds for the supply chain in 2025.

Retail Inventories Remain at Highest Levels since Pandemic Onset as Warehousing Utilization Continues to Rise

For the past two months, surveyed logistics managers have reported two consecutive months of increasing utilization of warehouse space at the same time as two straight months of declining capacity. However, both categories remain above 50.0, indicating that for now utilization and capacity are still anticipated to be in expansionary mode: utilization is expected to increase as well as capacity, although respondents expect capacity to be expanding at a rate slower than it is today in the next 12 months.

Meanwhile, the retail inventories-to-sales ratio held steady in October from the previous month with a reading of 1.3, indicating retailers have on average enough inventory to cover 1.3 months of sales. The index is now at its highest level since May 2020 and is up 20.9% from a trough reached in April 2021 when retailers only had 1.1 months of inventory on hand. Higher levels of sustained inventories can explain the rates of increasing warehouse utilization reported by logistics managers in recent months.