Here’s What Some Top Tenant Reps Expect on US Industrial Property Performance in 2024 Article originally posted on CoStar on April 22, 2024 After a record run of distribution center expansions in 2021 and 2022, U.S. industrial tenants have proceeded much more cautiously in recent months. Early 2024 data shows that industrial tenants have continued to lease and occupy more U.S. industrial space, but at the slowest pace since 2012. While there have been a few positive signs that may signal an impending recovery in industrial tenant demand, including a resumption in the growth of business inventories and goods imports, the timing of any potential recovery remains uncertain. Many manufacturers and distributors are pausing expansions and focusing on increasing efficiency at their existing locations through added automation. A major example of this trend was the decision by UPS to close 200 distribution centers over the next three years while consolidating operations into its most automated facilities. With industrial occupier demand evolving quickly, we gathered insights from brokers providing tenant representation and corporate real estate advisory services to a broad range of industrial users from different regions of the U.S., all of whom regularly communicate with Fortune 500 companies regarding their industrial space needs. Here are some of their perspectives on the expected performance of the U.S. industrial real estate sector in the year ahead. Northeast Eric Zahniser Managing Principal at Cresa Conshohocken, Pennsylvania Leasing velocity for industrial space in the Northeast is expected to be moderate through 2024, according to Eric Zahniser, managing principal at Cresa based in Conshohocken, Pennsylvania. While leasing activity may be lower, Zahniser said he is working on more user purchases than ever, especially on the part of manufacturing firms. The projects involve a mix of foreign direct investment and commercialization of new technologies, start-ups, and expansions by domestic companies. Also, given capital market conditions, Zahniser said this is an opportune time for speculative developers to sell facilities to users. Zahniser said those industrial tenants that are in the market for leasing space are seeking longer average lease terms and specific building specifications, a trend that is being driven by automation. “I’ve never seen this much focus on automation for both manufacturing and distribution. Every week another large company announces plans to optimize their distribution network by focusing on automated facilities while closing older ones. Automation is the catalyst for many of our projects and it is shaping what our clients want in terms of building specifications, such as slab bearing capacity, slab levelness and power capacity,” said Zahniser. Though the most active players in the industrial sector continue to be third-party logistics providers, Zahniser said most 3PLs have excess capacity right now which is moderating demand to a certain extent. “However, contract logistics projects are going out to bid, which will result in more transactions. The Northeast will always be a 3PL heavy market, due to the Port of New York/New Jersey and the population density. Amazon has absorbed more space than anyone in our market this year by a large margin. They have been very active,” he said. West Coast Reid Wilbraham Senior Vice President at CBRE Ontario, California CBRE’s Reid Wilbraham, a senior vice president in the firm’s Ontario, California, office said he’s seeing industrial occupiers proceed with extreme caution this year. Between the general economic uncertainty and rents retreating from COVID-era peaks, Wilbraham said most decision-makers are taking additional time to analyze their options. Noting last year’s slowdown in leasing activity and an increase in the amount of industrial space available for sublease, Wilbraham said more companies are looking at options to right-size their space. “This year, we’ve seen an uptick in activity, albeit at a slower pace, as companies carefully analyze the market before finalizing a transaction. Renewal activity continues to be robust as occupiers view this as an opportunity to take advantage of the slowdown in the leasing market,” said Wilbraham. “We are also seeing a notable increase in demand and transactions from overseas 3PLs hoping to get goods into the U.S., potentially hedging against the possibility of new tariffs on imports later this year,” he added. Like Cresa’s Zahniser, Wilbraham also sees building purchases by occupiers gaining traction. “For the first time in years, there are vacant buildings with ownership willing to sell, and occupiers are more mindful than ever about avoiding massive rent increases as their leases expire. The capital investment needed to set up a logistics operation has increased significantly and occupiers are fearful of losing leverage in a future renewal due to the cost of relocation,” making the ownership option more appealing, Wilbraham said. Overall, Wilbraham said he expects supply and demand in the U.S. industrial market to stabilize in 2024 after the blistering pace over the last few years. Central Zak Mirkowski Executive Managing Director at Savills Chicago Zak Mirkowski an executive managing director with Savills in Chicago expects industrial leasing transactions will still occur but at a lower volume than in the past several years. Industrial vacancy levels have continued to increase in certain Chicago submarkets while others prove to be more resilient, said Mirkowski. Net absorption remained in positive territory at the beginning of the year but has fallen off from the peak of the pandemic as many occupiers are pausing expansion and reevaluating their space requirements. He also said that industrial tenants are utilizing more tools and technology today to help optimize their space requirements and identify ways to reduce costs. “The last cycle was a unicorn when it came to demand for space, as many occupiers added to their portfolios as fast as they could,” said Mirkowski. “Today, companies are looking into ways to improve and offset the high cost of labor by investing in automation and performing labor studies to ensure their location selections align with their long-term business objectives.” While industrial occupiers are monitoring the current economic climate and its possible effects, Mirkowski said they are more focused on acquiring the necessary tools and data to analyze their supply chains and ensure they are utilizing their space efficiently.