The slump in industrial leasing continues into 2024, with all South Florida markets seeing slight upticks in vacancy and slowing rent gains.

Annual leasing activity has dropped between roughly 20% and 35% below levels achieved during the peak of the pandemic, and except for Fort Lauderdale, leasing activity also remains depressed relative to pre-pandemic average trends.

Slowing demand has resulted in an expansion in vacancies in all South Florida metros, but the trend is most pronounced in Palm Beach. Palm Beach’s industrial vacancy rate is now 100 basis points above its pre-pandemic level, while the vacancy rate in Miami and Fort Lauderdale remains below its pre-pandemic average from 2015 through 2019.

With negligible annual growth in real consumer spending over the last few months, and below-average growth in e-commerce sales, demand for freight remains subdued. Slower consumption has kept trucking spot rates, the price paid for loading product on a truck, close to pre-pandemic lows and hiring in the transportation and warehousing sector remains sluggish.

Flatlining consumption and freight activity indicate that this slump in leasing activity will be with us for some time. Additionally, elevated supply additions, specifically in Palm Beach, are generating increased competition within larger properties. Despite South Florida’s resilience resulting in tighter vacancies and healthier rent gains relative to the rest of the nation, the market still faces a challenging environment over the coming year.

Years of industrial space supply, calculated as the ratio between available space to annual leased square feet, has continued to rise across all South Florida markets. Fort Lauderdale has so far maintained the healthiest reading as it is seeing more moderate construction activity relative to Miami and Palm Beach, though the market still has over one year of available industrial supply.

On the flip side, Miami has 13 properties underway with more than 150,000 square feet, five of which have over 300,000 square feet. Palm Beach has three properties underway with more than 150,000 square feet, two of which have over 300,000 square feet. This new construction, coupled with slower leasing, has increased the years of supply ratio, which has closed in on one and a half years in Miami and stands at over two years in Palm Beach.

Industrial properties under construction with more than 150,000 square feet in South Florida remain over 90% vacant, totaling over 5.5 million square feet of available space. While these brand-new properties will eventually lease, the concentration of supply in these larger properties points to a higher years of supply reading in these segments relative to the aforementioned market averages.

In fact, when looking at years of supply in South Florida across space size ranges for properties with more than 150,000 square feet, the years of supply metric is much higher within larger space sizes. Available swathes of space of more than 150,000 square feet are expected to be leased in around two years or more, with the largest spaces of over 300,000 square feet taking over three years to lease.

This analysis is based on an optimistic demand scenario in which occupied space is close to the average seen between 2019 through 2023. If instead we use a demand scenario based on average occupied space from 2015 through 2019, which is more in line with current trends, years of supply climbs higher.

That said, world trade activity appears to have hit its lull in 2023. Additionally, U.S. retailers have upgraded their import forecasts recently, with restocking likely to begin in the second half of the year as the inventory-to-sales ratio remains low relative to pre-pandemic levels. These leading indicators, coupled with a slowdown in industrial construction starts, point to an eventual rebalancing of supply and demand after 2025.

Source:

CoStar Analytics

Juan Arias