The U.S. industrial vacancy rate increased for the 11th quarter in a row, rising by 14 basis points to 7.1%, the highest since 2015, according to Collier's Q1 report.
The pace of increase has slowed over the past nine months, following six quarters in a row when it exceeded 30 basis points per quarter. Although the rate was nearly double the bottom of 3.6% in 2022, it remained only slightly above the 15-year average of 6.3%.
The Midwest region recorded the lowest vacancy rate at 5.4%, while the West experienced the largest year-over-year increase, rising 158 basis points to 7.1%. Vacancy rates in U.S. markets near the Atlantic and Pacific coasts have climbed more rapidly over the past year. Charleston reported the highest vacancy rate in the country at 21%, with the sharpest annual increase — surging by 814 basis points.
New Supply
The new supply of 65 million SF marked the lowest quarterly total since the first quarter of 2019 and was 60% below the peak of 163 million SF delivered in the third quarter of 2023. As the current development cycle winds down, new supply is expected to align more closely with demand, leading to a peak in vacancy rates.
Demand as measured by net absorption decreased to 35 million SF, but was 12% higher than the first quarter last year. While economic uncertainty and ongoing ambiguity around tariffs may delay a significant rebound in demand over the coming quarters, net absorption is expected to stay in positive territory.
Space Under Construction
The total space under construction dropped to 279 million SF, the lowest level since 2018. As new construction starts remain limited, this number is projected to fall to around 250 million square feet by the end of 2025. Construction activity has dropped in every region of the country and nearly every market. Once confidence in renewed industrial demand and declining vacancy returns, a new wave of development is anticipated in balanced markets
Lease Rates
While rents have declined in some markets where growth exceeded 35% year-over-year during 2022 and 2023, overall warehouse and distribution rents grew by 6% over the past year to an average of $10.65/SF. Rents are expected to stabilize over the next few quarters until vacancy peaks and stronger demand returns.
