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Trends and Predictions for Industrial Real Estate in 2024

2024 is shaping up to be a pivotal year for industrial real estate, marked by continued demand but moderated growth.

Sustainable growth trajectory: After two years of unprecedented growth, the industrial sector has reached a more sustainable trajectory. As of November, there were 505 MSF of industrial space under construction, accounting for 2.7% of existing inventory. However, capital becoming more expensive has led to a slowdown in new construction activity and buyer and seller activity tempering. Construction starts have decreased by 64% since 2022 due to high capital costs.

Supply-driven mini-cycle: Industrial completions hit historic highs in 2023, rising 33% YoY by Q3, fueled by pre-rate hike construction starts and capital market cooling. Prologis' Head of Global Research, Melinda McLaughlin, observed a supply-driven "mini-cycle" in the logistics market, with a temporary surge in new supply, followed by fewer deliveries in 2H24. Vacancy should hit historically low levels in mid-2024 before dropping more with lower supply and higher demand.

Remaining challenges: Capital availability for new industrial projects is a major challenge for developers and operators. Conservative underwriting lowers bids and fosters build-to-suit projects. But regional markets differ. SoCal and NJ's entitlement processes limit service, while Southeast markets enjoy development growth due to high population. Retailers regionalize operations for faster delivery and lower expenses.

➥ THE TAKEAWAY

Zoom out: 2024 will see a surge in U.S. manufacturing investments driven by reshoring and nearshoring, coupled with a strong emphasis on sustainability. While tackling skilled labor and energy challenges, markets that offer incentives and collaboration stand to gain. Concurrently, a growing commitment to sustainability is evidenced by efforts to reduce carbon footprints through innovative, eco-friendly practices and materials.

Record Number of Office Tenants Sign $100+ PSF Leases in Manhattan

Manhattan's office market is experiencing a surge in high-end leasing activity, with a record number of office tenants signing leases with starting rents of $100 PSF or more in 2023, according to brokerage firm JLL. 

Top-dollar leasing: Last year, Manhattan saw a record number of deals with starting rents of $100 PSF or more, totaling 192 leases and 5.6MSF of space. This accounted for 26% of the total leasing activity in Manhattan last year. Financial services firms, such as private equity and hedge funds, dominated this leasing activity with an 80% share, followed by legal services with an 8% share.

Flight to quality: Despite a lackluster return-to-office rate and economic uncertainty, there is a growing demand for high-quality office spaces. Tenants are gravitating to new construction and heavily renovated assets, seeking desirable space even in the face of challenging conditions. The surge in top-tier leasing activity highlights the preference for higher-quality products despite remote/hybrid work.

Tech sector retreat: While financial services continue to dominate top-dollar leasing activity, the tech sector has seen a decline in its share of high-end office deals. In 2023, tech accounted for only 5% of the top-dollar leasing deal count and 6% of square footage, down from its peak in 2019 when it accounted for 50% of square footage and 13% of deals.

➥ THE TAKEAWAY

Bouncing back: Despite fragility in the market, Manhattan's high-end office market remains strong. Top-dollar leasing activity signals demand for quality office spaces, especially in new construction and renovated assets. The high end of the market has rebounded, with starting rents up 6% and availability rates decreasing.

The Federal Reserve’s fight to rein in inflation is squeezing the ability of real estate investors to make money.