South Florida’s Industrial market continues to feel the impacts of a slowdown in economic activity, with demand for large logistics properties remaining subdued relative to elevated pandemic levels.
Leasing activity has dropped to pre-pandemic lows since the second half of 2023, which, coupled with a rise in newly completed properties, has expanded space availability across size ranges.
While transportation and warehousing employment, an indicator of industrial space demand, has yet to see a significant contraction in South Florida, growth has stagnated. This easing in employment gains has followed a slowdown in real retail sales growth in the area, as above-average inflation has hurt consumers.
As residents and businesses continue to adjust to higher costs, 2024 will likely remain a sluggish year for industrial demand. That said, improving economic growth in 2025 and a softer supply pipeline should help vacancies contract again, ushering in an eventual re-acceleration in rent growth.
A clear indication of an improvement in the supply and demand balance as we advance is the slowdown in construction starts that began to take hold in late 2023. Annual construction starts are now at their lowest level since 2015 across South Florida, with less than 300,000 square feet of groundbreakings in the first quarter of 2024, the lowest quarter for construction activity since 2017. This slowdown will result in a moderation of building completions by the first half of 2025, with net absorption, or the change in the number of occupied square feet, outpacing new supply once more by the end of next year.
In this shifting landscape, industrial vacancies will remain below 5% in the greater South Florida region. Palm Beach, impacted by a more significant supply/demand imbalance, will see an above-average vacancy rate, topping off at 6% before coming back down in late 2025. Still, all South Florida markets will retain below-average vacancies relative to the rest of the nation.
This limited space availability will continue to drive the region's outperformance in rent growth. Although industrial asking rent gains in South Florida slowed down from double-digit levels in 2022, they ended the first quarter of 2024 at 7.6%, well above the 4.7% gain in the rest of the country. All South Florida markets were in the top 20 for rent growth out of the largest 54 US metro areas, with Fort Lauderdale excelling into 7th place.
Although these rent gains will continue to moderate in the near term as supply and demand readjust, market players are confident that the South Florida industrial market is on the mend.
In a recent exchange with Paul Shooster, senior vice president at Butters Realty & Management, he indicated that their “outlook for the market is decidedly positive. We anticipate a year-over-year increase in activity and deal flow.”
Still, his team continues to see concessions, with these remaining “more prevalent in areas with a higher competition among large assets or where the demand is catching up with supply. This is often observed in areas north of Miami, where the market dynamics differ slightly, and landlords may offer more incentives to attract and retain tenants.”
“Larger assets, particularly those built on speculation, may have longer lease-up periods due to their specialized nature and the smaller pool of potential tenants. Conversely, smaller assets, which cater to a broader range of businesses, tend to lease up more quickly.”
Despite some challenges carrying over from last year, industrial rent gains and vacancies remain close to as healthy as they have ever been in South Florida. Additionally, forecast expectations indicate a strengthening in these market fundamentals within the next two years. This positive outlook has helped drive continued investor interest despite a higher interest rate environment.
In fact, the last quarter of 2023 was the fourth-highest quarter for industrial volume in South Florida, totaling over $1 billion transacted. Eight transactions for over $20 million have occurred since October of 2023, with multiple large portfolios trading hands.
Private equity, institutional players and users have been active buyers over the last year, specifically in Miami and Fort Lauderdale, as buyers bet on continued upside in market fundamentals despite limited pricing changes since 2022.
A recent Colliers report also highlighted continued optimism in market expectations. The report notes that limited supply by 2025, stable vacancy rates, healthy rent gains, and a scarcity of land, particularly in Miami and Fort Lauderdale, will continue to support industrial property performance.
In a recent conversation, Erin Byers, executive vice president at Colliers, provided further insights. “While it feels there is a slowdown and there is a pause from tenants, specifically larger ones, in making decisions due to much higher rental rate,” activity is ongoing. South Florida remains “insulated and strong.”
A slowdown in “consumer spending, which drives 3PL demand, has impacted leasing activity for larger spaces. Still, “hospitality, tourism, and food industry tenant demand is doing quite well.” Additionally, demand for smaller spaces remains the healthiest, with “distribution companies that service Latin America within the 20,000 SF to 40,000 SF range” contributing to leasing activity here.
This dynamic of healthier demand for smaller spaces is further reinforced by data, with the vacancy rate for properties with less than 10,000 square feet at 1.7%, 10,000 square feet to 25,000 square feet at 2.4%, 25,000 square feet to 100,000 square feet at 4.1% and the largest segment with more than 100,000 square feet at 4.9%.
While the market remains active and the pandemic-induced rent surge has held, owners have continued to boost occupancy through concessions rather than a move in base rates. South Florida has enjoyed “many months with little to no concessions, now a few months of free rent and some tenant improvement dollars” are more common. Owners are more focused on “keeping tenants in place today,” given the competitive inventory coming online.
While Byers anticipates limited deal activity in 2024 compared to pandemic levels, she sees a recovery in rent growth and a contraction in vacancies returning to the market by the middle of 2025 as the supply wave passes. This outlook, which aligns with CoStar forecast expectations, should contribute to healthier levels of deal activity, assuming a loosening of financial conditions over the same period.