Though Covid has become a distant memory, the aftershocks on the industrial real estate sector throughout the United States are going to be felt for years. The historic surge in warehouse demand from 2020 to 2022 has now been met with a grossly overbuilt speculative market, and a simultaneous contraction of industrial tenant requirements. As a result, building owners are left stunned with the market pivot that has occurred in the last 18 months. Across the country, industrial availability rates in every major industrial market are back to, or have dramatically exceeded their pre-Covid conditions.
Availability Spikes Nationally
The chart below compares year-to-date availability with that of when the market was at its tightest in Q1 2022. Industrial markets around the country have been whipsawed from some of the tightest in history to now dramatically softening.
Many landlords are responding to this by dropping their rent and providing large free rent packages, but others are stuck with a debt or capital structure where they simply can’t meet the market today. In certain markets, like the Inland Empire in Southern California, aggressive landlords are discounting 30% to 40% off their 2022 effective lease rates. Other dramatically overbuilt markets are similarly being crushed throughout the United States, especially the Sun Belt, which took on most of the supply surge during 2021 to 2025. To put it in perspective, over 1.9 billion square feet of new industrial space was built throughout the United States from 2021 to present day. Never in history has something like that occurred. While commercial real estate investors, developers and lenders all assumed that the 2020 to 2022 demand spike would last infinitely, they all bet wrong. Now they are paying the price for this collective miscalculation, while tenants have more options than they’ve had in history.
Industrial Change from “Pyramid” to “Hourglass” Availability
Historically, the larger the building a tenant needs, the fewer the choices—as if the market looked like a pyramid, with a large base of smaller spaces available and availability reducing as tenants require bigger spaces. That is conventionally the case as commercial real estate developers have previously been cautious of adding too many big “expensive-to-build” buildings to the market, so excess market capacity of large buildings has historically been rare. The market was so tight for buildings over 100,000 square feet from 2021 to 2022 that tenants often got in bidding wars over them. For the first time ever, market availability now presents itself as an “hourglass” shape, with a multitude of available space for smaller tenants, a natural reduction of options for mid-sized tenants and an explosion of options for tenants over 80,000 square feet. Consider the two hourglass shaped conditions below, representing all of the available industrial space in both Dallas-Fort Worth, Texas, and the Inland Empire (Southern California), by the number of options a tenant has today in each size range. The numbers are staggering for tenants of any size, but particularly tenant-favorable at the lower and higher ends of the square footage range.
Record Sublease Inventory
Simultaneously to this oversupply, we have seen a reversal of demand as e-commerce and distribution companies adjust to the normalizing of consumer behavior towards pre-Covid conditions, and a general slowdown of consumer purchasing related to lack of consumer confidence and inflation. Sublease inventory is always the “canary in the coal mine” as to how Corporate America is digesting their past space commitments. Right now, many tenants have stomach pains from excess space commitments and have put a record amount of industrial space on the market for sublease, which grows by the quarter.
Tenants have now joined the fray to be landlords’ biggest discounted price competitor, and sublease inventory around the country exceeds 2.5x historic market equilibrium, showing no sign of slowing down. What’s difficult for most companies looking to sublease today, is that not only do they face dwindled market tenant demand, but most of these companies that signed leases in 2021 through 2023 now find their current rent is well over market, and are likely to take huge losses on these subleases as prospective subtenants look for value. This is particularly the case in these five markets with the most concentrations of sublease space available in the U.S.: the Inland Empire, California at 19.1M SF; Chicago at 14.4M SF; Dallas-Fort Worth at 14.7M SF; Atlanta at 13.8M SF; and Los Angeles at 10.9M SF.
The Tenants’ Market Arrival
Commercial real estate industrial tenants that have leases expiring in the next three years are going to be facing the softest market we’ve seen since 2000. There is a plethora of new state-of-the-art buildings that are going to be extraordinary valued. For companies that want to own their real estate, there’s likely going to be a buying opportunity opening in 2027 and 2028, as inevitably some of these speculative building owners will be foreclosed upon by lenders needing to liquidate these assets.
Great deals today are not just a given, as we are having to fight for them on every deal and create real optionality since the landlord brokerage community that backstops and promotes owners’ interests is doing everything they can to resist the changed market conditions. No matter how big of a tenant you are, and virtually no matter what major metro market you’re operating in, it’s a great time to be an occupier of industrial space. But you must have alignment with your representative to act as your non-conflicted tenant advocate who can identify the landlords that are willing to meet today’s market conditions, and who has the courage to push building owners to transact at terms reflecting today’s realities.
Market statistics provided by CoStar Group.
