Industrial Rents Surge 3.5% in 2024: A Closer Look

In 2024, the industrial real estate market witnessed a significant shift, with industrial rents surging by 3.5%. This increase, while lower than the 10% per annum growth experienced between 2019 and 2022, still represents a substantial change in the market dynamics. Several factors contributed to this rise in rents, shaping the overall industrial real estate market in various ways.

Factors Driving Industrial Rents Growth

1. E-commerce growth: The continued expansion of e-commerce has driven demand for warehousing and distribution centers, leading to increased rents. In 2024, Amazon restarted leases, adding 10,700 new workers to the Warehousing and Storage sector in July alone. This growth in e-commerce has put upward pressure on industrial rents, as companies seek strategic locations for fast delivery.
2. Supply chain shifts: Companies are adjusting their supply chains to improve resilience and optionality, leading to increased demand for industrial spaces. This trend is expected to contribute an incremental 75 million square feet of new annual demand over the next five years. As companies diversify their supply chains, they are seeking out new locations and facilities, driving up rents in various markets.
3. Regional market dynamics: Western markets, particularly the Bay Area, led in industrial sales prices, with the Bay Area topping at $518 per square foot. This high demand and limited supply in these regions have contributed to rent increases. Meanwhile, Southern markets stood out in lease spreads, with Miami topping at $5.76 per square foot, indicating a strong emphasis on lease terms and flexibility.
4. Interest rates and new construction: Higher interest rates have slowed new construction, leading to a decrease in completions expected to hit a 10-year low by late 2025. This reduced supply has put upward pressure on rents, as the limited availability of new industrial spaces drives up demand for existing properties.

Impact on the Overall Industrial Real Estate Market

The rise in industrial rents in 2024 had a significant impact on the overall industrial real estate market, affecting investment activity, occupancy rates, and new construction.

1. Investment Activity: The increase in rents made high-value assets more attractive to investors, leading to a focus on Western markets for these investments. However, the challenging business environment worldwide and high operating costs may have contributed to a projection of moderate growth rates for industrial rents between 0% to 3% in 2024.
2. Occupancy Rates: The rise in rents led to a flight-to-quality trend among tenants, with businesses opting for high-quality, high-specs real estate that meets ESG, wellness, and people-focused goals. Multiple-user factory vacancies eased to a 10-year low at 9.5%, and the vacancy rate for warehouse space fell to 8.4% in Q4 2023, indicating a strong demand for quality industrial spaces.
3. New Construction: The rise in rents and strong demand for industrial spaces encouraged new construction, with a slew of new developments in the pipeline for 2024, including 2.4 million sq ft of multiple-user factory GFA and 4.2 million sq ft of warehouse GFA. However, interest rates have slowed new construction, with completions expected to hit a 10-year low by late 2025.

In conclusion, the 3.5% increase in industrial rents in 2024 reflects the complex interplay between e-commerce growth, supply chain shifts, regional market dynamics, and interest rates. As the industrial real estate market continues to evolve, investors and businesses must stay informed about these trends to make strategic decisions and capitalize on opportunities.