2024 Industrial Market Predictions

The summer of 2023 felt like 2018, activity was slower and less transactions were closing. I attribute the lack of transactions to increased interest rates, stubbornly high construction costs, and less confidence from tenants and buyers. Despite a sluggish summer, vacancy rates remain historically low. Vacancy in spaces less than 30,000 SF is the lowest and most of the time, a tenant or buyer is not able to lease or buy the space that they are looking for. Q4 has been incredibly strong, similar to 2021-2022 levels of activity and we feel a strong wave of demand entering the market.

We expect vacancy to remain at record lows (sub 3%) during 2024 despite some aspects of the macro economy slowing. With major companies breaking ground on projects in Tucson like America Battery Manufacturing and Becton Dickinson, we expect more ancillary businesses to expand and/or move into the Tucson market, absorbing more space. While there is some speculative construction, there is not enough, especially for bays less than 50,000 SF. When we look at the Tucson vacancy rate, the majority of vacancy is with bays larger than 100,000 SF and all it takes is a few tenants to fill those vacancies and we will reach a vacancy rate less than 2%, possibly less than 1%.

2024 construction will occur mostly in the Airport and Vail market as those markets have available land and increased growth from both residential and industrial construction. The Northwest and Marana market will continue to see high lease rates, especially in flex markets. There is a need for more industrial land in the Marana market and as ag land gets re-zoned, we may see more industrial opportunities.
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There have only been a handful of speculative projects with bays less than 20,000 SF and they have all been successful despite construction delays, rising construction pricing, rising interest rates and persistent labor shortages. Right now we aren’t seeing any beginning stage flex projects being built, mostly due to construction pricing and labor shortages. We expected interest rates to pose a bigger threat but the cost to build is the biggest challenge in Tucson.

There is money out there ready to build but it is tough to make the numbers pencil out with all time high construction costs and wage inflation. Lease rates have increased substantially over the past few years, even passing the $1.00 NNN mark but they will need to increase even more. I’m seeing demand for flex space in every part of the market and think the key to a successful speculative flex project is to have a retail component to get lease rates north of $1.60 NNN.

I expect user building prices to remain strong and even increase during 2024 as available buildings continues to remain low while demand remains strong. I think $100+ per square foot for user buildings is here to stay and buildings with industrial outdoor storage commanding prices north of $120 per square foot. If I were to build the perfect user building in 2024 it would be a pre-engineering metal building around 10,000-20,000 SF on at least an acre with minimal office. There are plenty of tenants and buyers out there looking for a 10,000-20,000 SF stand alone building with close to nothing available.
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We expect 2024 investment sales to remain low as investors can’t make 2021 prices pencil with 2024 interest rates. In addition to rising interest rates, banks are tightening their lending. The 2024 reality is that banks will have less to lend out and they are much more conservative. Access to debt will also create headwinds for construction.

2024 will continue to be a K shaped recovery both in the economy and real estate. Some aspects of real estate are feeling pain, like office and multi-family, while others are stronger than ever, like flex.  We have seen more businesses file for bankruptcy or get locked out but the spaces backfill quickly and most vacancies are appearing in class c product. The businesses that we have seen struggle are businesses that have struggled from lack of skilled labor, access to materials or struggles to raise pricing. The reality of this new economy is that everything is more expensive and businesses need to raise their pricing or they are going to go out of business.
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Some of Tucson’s economic tailwinds that will continue to push rents up are; mining, on-shoring, distribution, and residential and industrial construction. As these four catalysts have a bright 3-5 year future, we expect flex, IOS and industrial vacancy to remain low while lease rates increase. Meanwhile, three re-development projects are set to demolish around 200,000 SF+ of existing class b, flex buildings. We expect continued strong demand while existing supply is set to be demolished which will push lease rates higher. Less supply, more demand, and higher pricing will be the theme for 2024.