Tight warehouse demand eased slightly in Q2, Cushman & Wakefield says

Industrial vacancy rates for warehouses and other buildings rose slightly in the second quarter, revealing the first softening in years of vice-like demand for inventory storage space in a tight market, according to a report from the commercial real estate services firm Cushman & Wakefield.

The news is in line with various measures showing a gradual slowing of the economy—such as the Logistics Managers Index (LMI)—as the Federal Reserve continues to keep interest rates high to fight overheated inflation.

The overall industrial vacancy rate increased by 60 basis points to 4.1% throughout the second quarter, marking the first time since mid-year 2021 in which the rate exceeded 4.0%, the Chicago-based firm said. Cushman & Wakefield defines the industrial real estate segment as including warehousing, distribution centers, manufacturing, industrial office services, and flex/high tech.

Fueling the rise in vacancy has been the strong completion totals of speculative developments across the marketplace coupled with the consolidation and right-sizing of occupiers due to tempered consumer demand and elevated inventory levels.

“While we have seen the amount of industrial space under construction drop, we are now seeing the impact of the robust pipeline of product coming to market and easing pressure on markets that were at historically low vacancy rates through the pandemic,” Jason Price, senior research director for U.S. Industrial & Logistics at Cushman & Wakefield, said in a release. “Coupling this with tempered consumer demand, we see generally softening market conditions.”

Developers helped to loosen the market for warehouse space by delivering more than 139.5 million square feet of new industrial product throughout the second quarter, the third highest quarterly total on record.

Still, most of that space was quickly gobbled up. Although a challenging economic climate has persisted, new leasing activity remained healthy with 141 million square feet of deals signed in the second quarter, down just 9.0% from the first quarter, the firm said. That puts the year-to-date total of 296 million square feet signed on par with the midyear average achieved from 2018-2020.

“Industrial markets are continuing to normalize after coming off historically high demand registered over the last few years. Vacancies remain below the five-year quarterly average even as the market cools somewhat,” said Price. “Demand for space continues to come from across a wide variety of industrial and warehouse users giving us confidence that market conditions will stabilize at a more balanced level.”