Uncertainty has characterized the U.S. industrial market since recession fears emerged in early 2022 as inflation and rising interest rates began threatening the key drivers of occupier demand: consumer spending and business expansion. The market shows signs of cooling, with vacancy increasing 100 basis points off last year’s record low to 4.8%, while blockbuster rent growth is slowing down. With nearly 700 million square feet (msf) under construction, elevated supply is virtually guaranteed in the near term. But how high will vacancy get, and where are frothy rental rates headed over the next 18 months? This hinges on forecast demand, i.e., absorption, which will largely depend on the direction of the broader economy. The current sentiment is both mixed and in flux. GDP increased at a 2.4% annual rate in the second quarter, beating analyst expectations, and now 71% of business economists peg the risk of a recession in the next 12 months at 50% or less. Additionally, the 2024 presidential election looms.

Savills Research has devised three trajectories to stress-test the market: a base case of normalizing demand, an upside where recent heightened activity resumes and an increasingly unlikely downside case of a major contraction on par with 2008. In all instances, the current historically low vacancy, as well as a pause in new construction starts, provides a substantial buffer that will keep vacancy in the single digits and rents well above pre-COVID levels.  

Rent vs. Vacancy: History and Forecast Scenarios

Deliveries vs. Net Absorption: History and Forecast Scenarios

Scenario 1: Normalizing Demand (Base Case)
Probability: High
Peak Vacancy: 6.4%
Change From Current: +160 bps
Annualized Rent Growth Through 2024: 2.7%

In the first scenario, the Savills Research base case, slow and steady economic growth will cause net absorption to retreat to 2019 levels, averaging 61.1 msf over the next six quarters. This equates to less than half of the record quarterly average witnessed from 2021 and 2022. Heightened new supply will push vacancy higher until it tops out at 6.4% in Q3 2024, a height not seen since 2016.

Scenario 2: Frenzy Resumes (Upside)
Probability: Medium
Peak Vacancy: 4.8%
Change From Current: 0 bps
Annualized Rent Growth Through 2024: 6.5%

In the optimistic case, after a one-year blip, historically elevated demand resumes as the economy grows on a solid footing in the context of a soft landing. Secular demand trends around e-commerce, onshoring and population growth/migration produce quarterly net absorption on par with 2021 and 2022 levels. Vacancy falls gradually as landlords gain the upper hand again in 2024, aided by the stall in construction starts that impacts deliveries by mid-2024. Rent growth does not hit double digits but is still strong historically speaking.

Scenario 3: Major Pause (Downside)
Probability: Low
Peak Vacancy: 9.3%
Change From Current: +450 bps
Annualized Rent Growth Through 2024: -2.1%

There is a low risk of a significant recession. The low-probability scenario would be that vacancy rises substantially as net absorption drops to 2009 levels while elevated new supply continues to hit the market. Even under this worst-case scenario, vacancy still does not reach double digits. Face rents decline modestly in addition to higher concessions to lease up vacant space, such as free rent, but even net effective rents remain substantially above pre-COVID levels.

The current relatively low vacancy, as well as substantial drop in construction starts, is a mitigating factor across all possible scenarios. While supply and demand dynamics vary considerably across regions (see Q2 2023 State of the U.S. Industrial Market), in most markets tenants have an opportunity to capitalize on the current environment to secure more favorable lease terms over the next 12 months before conditions begin to retighten. This will likely take the form of more flexibility and concessions as face rent relief will not occur under the most likely scenarios.

Source: Savills Research 

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