The Industrial Construction Boom is Fading Post Pandemic
Industrial construction experienced a major four-year boom during the pandemic, driven by high consumer demand. Fast forward to 2024, and this is no longer the case for industrial construction, including warehouses and distribution centers, as starts have slowed significantly. The rapid expansion during the pandemic has outpaced current demand, leading to increased vacancy rates and hesitation from developers. Although industrial construction activity has decreased and will likely continue this trend throughout the year, this slowdown should not affect manufacturing construction, which remains relatively steady, according to a report from Construction Dive.
In fact, new construction starts fell by more than 40% between 2022 and 2023, with 341.9 million square feet breaking ground last year. This deceleration has carried into 2024, resulting in a significant slowdown from previous quarters. However, many contractors remain optimistic about the long-term prospects of the manufacturing sector, even with a recent dip in construction activity. General contractors in this space share the sentiment that the downturn will not last and predict an increase in activity soon. This outlook, however, does not extend to warehouse and distribution projects, due to increased interest rates, tightened standards for construction loans, and overall economic uncertainty, according to a report from CommercialEdge.
Since 2020, 1.8 billion square feet of industrial space have been delivered across the U.S., surpassing the entire previous decade. An overstimulated economy drove consumer demand for durable goods to record levels in 2021 and 2022, prompting developers to build industrial facilities at a rapid pace amid historically low vacancy rates. Now, with occupier demand fading, slightly more than half of the square footage built in 2023 remains available for lease, pushing vacancy rates back up nationwide.
Despite the significant drop from recent peak starts, the industrial construction pipeline remains above long-term averages. This suggests that the window of opportunity for occupiers may be brief, as many markets are expected to experience a resurgence in demand by 2025, with new supply being absorbed more quickly than in the past 18 months. Deliveries are expected to decline in the coming years due to barriers to entry, higher construction costs, and developers pausing new projects until market fundamentals and the lending environment improve. However, as supply slows and leasing intensifies alongside decreasing vacancy rates, rental rate growth in most markets is anticipated to increase.
Real estate investors should care about the fading industrial construction boom because it signals shifting market dynamics that can impact investment strategies and profitability. As the rapid expansion of industrial facilities outpaces current demand, increased vacancy rates and slowed construction activity present both challenges and opportunities. The reduced pace of new projects can lead to short-term oversupply, exerting downward pressure on rental rates and occupancy levels. However, this market correction also sets the stage for a potential resurgence in demand, particularly in the manufacturing sectors, as economic conditions stabilize.
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