Industrial Vacancy Is On The Rise

In most markets throughout the US, industrial vacancy is on the rise but it’s important to understand which part of the market vacancy is rising in. Over the past 5 years during this development boom, the vast majority of industrial was built in the large bay markets, 100,000 SF+ bays. In markets that don’t have excess land to build, for example port markets, not as much product has been built. With markets that can keep expanding into the suburbs, more and more concrete tilt warehousing has been built.

Unfortunately the small-medium bay market has been left out despite massive persisting demand for small-medium bay warehouses. Vacancy for small-medium bay has actually decreased in most markets despite overall vacancy increasing. Lease rates for this mid range warehousing have also increased along with user sale prices.

The main reason that bays less than 100,000 SF haven’t been built is the cost of construction. The cost to build this product in some markets is double or even more compared to what existing construction can be built for. In addition to construction costs rising, land values have also increased substantially, either from users, build to suits, industrial outdoor storage or speculative bigger bay construction.

As vacancy for small-medium bay remains historically low, users buy land and build because why buy an existing warehouse for $180 per square foot when you can build exactly what you need for $200-300 per square foot?

While some markets have increased vacancy, the vast majority of that vacancy is with big bay. The Tucson industrial market as a whole remains under-built and under-supplied.