Industrial vacancy rate holds at 6.6% in Q3 amid drop in construction starts and strong 3PL leasing activity, CBRE says

New research recently issued by Dallas-based industrial real estate firm CBRE pointed to signs of ongoing stabilization in the industrial leasing market, for the third quarter.

That was evidenced by various factors, cited by CBRE, including third quarter industrial leasing remaining robust, with occupiers upgrading into newer facilities, outsourced to third-party logistics (3PL) providers, or renewed leases nearing expiration.

A key thesis in the report was focused on how the pairing of strong leasing and a decline in new construction held the overall quarterly vacancy rate at 6.6%, which the firm said reversed a stretch of quarterly losses that had been intact going back to the second quarter of 2022.

“The decline in construction was expected in Q3 and was a direct result in the decline in construction starts in 2024,” James Breeze, CBRE Global Head of Industrial Research, told LM.  “Construction starts have declined due to growing vacancy rates and escalating construction costs from higher interest rates and tariffs on raw materials. A larger percentage of both completions and construction starts are build-to-suits. Build-to-suits are both a preference for developers and occupiers. Occupiers are looking for more specific build-outs to account for more customized racking and greater use of automation. It is easier to design these specifications from the ground up rather than adapting a speculative build. Developers can lock in longer term rents and do not need to worry about leasing the space in a higher vacancy environment.”

That was made clear in various Q3 data points cited by CBRE, including: the availability rate increasing 9.2%; the vacancy rate increasing 6.6%, net asking rent falling to $10.75 (per square-foot), year-to-date net absorption down 79.0 million square-feet (and at 53.3 million SF in Q3, with CBRE noting that the completion of several large build-to-suit facilities driving the increase and helping to offset ongoing occupier consolidations), and year-to-date completions down 191.3 million square-feet and coming in at 61 million SF, sharply below the 329.7 million SF recorded for the same quarter a year ago.

From an industrial demand leasing perspective, CBRE found that e-commerce again made strong inroads, with the e-commerce share of total non-auto sales rising for the third straight quarter to 23.5%, up 2.4% from the second quarter. It also noted that even though e-commerce sales growth has seen moderation since the pandemic, it still serves as a key driver of warehouse demand, with retailers and 3PLs “prioritizing facilities that are closer to major population hubs.”  

CBRE found that 3PLs were the leading occupier type for bulk leasing growth, which it defines as buildings 100,000 square-feet or more) coming in at 156,516,210 square-feet, for a 36.2% market share, followed by General Retail & Wholesale, at 90,936,540 SF and 21.0% market share, and Manufacturing, at 50,012,468 SF, and 11.6% market share, rounding out the top three.

Breeze said that occupiers are outsourcing to 3PLs for a few different reasons:

• Import Flexibility-Labor disruptions, extreme weather patterns and geopolitical uncertainty have led many companies to diversify their import locations. Utilizing 3PLs allows for more inventory flexibility, a key component to retailer success in times of uncertainty;
• Capital Allocation/Preservation-Warehousing and distribution of goods is expensive. Whether it’s transportation costs, rent or labor, supply-chain-related capital expenses can drain resources. Outsourcing to 3PLs provides companies with more flexibility to increase or decrease their inventories without any risk of signing their own lease commitments. Using a 3PL also allows companies to switch supply chain costs from capital to operational expenses, which helps reduce upfront costs, increase capital flexibility and improve budget predictability; and
• Focus on Core Competency-Another benefit of outsourcing their logistics operations to 3PLs is that it allows companies to focus on core business competencies that drive revenue, such as product development, sales and customer service. Capital expenses that drive revenue are more likely to be approved by company leadership than those that are supply chain related.

“We expect these trends to not only continue but to expand in the coming quarters for the factors mentioned above,” said Breeze.

CBRE found that Q3 construction completions outpaced absorption for the 13^th consecutive quarter, with space under construction increasing to 226.9 million SF, following quarterly declines over the previous two years.

Breeze said CBRE expect completions to outpace net absorption due to move-outs of older facilities, while adding it’s important to note that there is a difference between total completions and completions of available space.

“While we expect total completions to be higher, available completions and net absorption will be close to equilibrium which will help stabilize vacancy rates,” he said.