The series of interest rate increases initiated by the Federal Reserve in early 2022 has helped curtail the record wave of new distribution center development that was underway. Throughout the summer of 2023, industrial tenant demand softened and the pullback in groundbreakings grew more extreme.

Since the beginning of July, only about 45 million square feet of industrial properties started construction in the United States, according to CoStar data. If developers continue at this pace through this month, it will result in the lowest tally for the third quarter of U.S. industrial construction starts that CoStar has recorded since 2013.

However, it will take several months before the recent pullback in groundbreakings translates into fewer options for industrial tenants seeking newly built space. Industrial construction starts reached the highest in more than 30 years in 2022, despite slowing during the final months of that year. Many of the projects that started last year have also since encountered delays due to shortages of a range of building components including structural steel and electrical switchboards.

This all means that the U.S. industrial market still faces a deluge of unleased new distribution space completing construction in late 2023 and early 2024. However, the average time spent under construction for large industrial projects completed so far in 2023 was 14 months. Even if delays mount further and construction timelines rise another 10% to 15%, by late 2024 or early 2025, the amount of new industrial space completed each quarter is set to hit a 10-year low, an after-effect of the pullback in construction starts that is underway.

The relative dearth of new industrial space set to complete construction in late 2024-2025 suggests that if tenant demand for industrial space begins to recover during that period, empty industrial space available for lease could once again decline rapidly.

The recent pullback in industrial construction starts has not played out evenly across U.S. markets. Faster-growing metropolitan areas such as Austin, Phoenix and Las Vegas all have large amounts of open land on their exurban fringes. In these markets, construction starts for unleased industrial properties over the past four quarters have still been running ahead of typical annual net absorption rates, the amount of additional space occupied by tenants, averaged in each of these markets over the past five years.

By contrast, in most other large markets, construction starts of distribution centers over the past four quarters have fallen well short of the five-year historical average for annual net absorption. That list includes such major markets as Houston, Chicago and Columbus, Ohio, where industrial construction levels have historically ranked among the highest in the United States.

Atlanta stands out as having seen one of the most dramatic reductions in construction starts of any major U.S. market in recent quarters. Over the past four quarters, construction starts for unleased industrial properties have totaled just 6.2 million square feet. That figure is more than 70% below the average for construction starts during the previous two years and is also less than half of the annual net absorption Atlanta averaged over the past five years.

This all means that very little new industrial space will likely be wrapping up construction in Atlanta during late 2024. If tenant demand for additional space during that period is anywhere close to the market’s long-term average, the market for distribution space there will tighten significantly.