(The following story appears in the Journal of Commerce's Annual Review and Outlook issue published Jan. 1, 2024).

The big picture: Warehousing is more widely available across the United States, even in historically tight markets such as Southern California and Chicago, thanks primarily to inventory destocking and the completion of multiple major construction projects. But with vacancy rates still below pre-pandemic averages, capacity will likely remain tight enough to keep pressure on rents and leases in the coming year.

A look back: Finding warehousing and distribution space was like searching for a needle in a haystack during the COVID-19 pandemic, with overstocked inventories dragging the national US vacancy rate down to 3.4% by the end of 2022, according to industrial real estate developer JLL. What followed in 2023 was the Great Destocking. Inflation-adjusted US inventories that peaked in the fourth quarter of 2022 declined nearly 20% through September, according to Jason Miller, associate professor of logistics at Michigan State University and a Journal of Commerce analyst. Still, inventories remained about 7% above 2019 levels in September, while sales were below 2019 levels, Miller said. As inventory levels dropped, the US warehousing vacancy rate rose, reaching 4.9% by the end of the third quarter, although that was still below the pre-pandemic average of about 7%, according to JLL. At the same time, warehousing employment fell, with US payrolls sliding 4.2% from their 2022 peak in October, according to unadjusted data from the US Bureau of Labor Statistics (BLS). By contrast, warehousing payrolls jumped 17.4% year over year in 2022 amid surging imports. That indicates destocking — although uneven across wholesalers, retailers, and manufacturers — was progressing as the year went on, gradually freeing up warehousing space. Average rents for industrial space rose 15.3% year over year in the third quarter, according to JLL, but those increases are expected to slow in 2024.

A look ahead: Many shippers are postponing decisions on warehousing and distribution expansion as 2024 gets underway amid predictions of slower US economic growth, but industrial real estate developers nonetheless expect strong construction activity in 2024. Some shippers are opting to renew leases on existing space rather than expand, but development is continuing in some markets, notably in the US Southeast and mid-Atlantic port regions, as well as along the border with Mexico. Warehousing in those regions is benefiting from shifting global trade patterns, as a higher percentage of imports moves through East and Gulf coast ports and manufacturing expands in Mexico. Developers flocked to US Southeast port cities from Norfolk, Va., to Savannah, Ga., last year, and there are plenty of projects still on the books for 2024 and beyond. Warehousing and cross-dock space in Laredo, Texas — the largest US-Mexico border crossing for truck freight — also remains tight. Continued diversification in US entry points will eventually lead to greater demand for warehousing and storage at inland nodes as freight finds its way into the US interior along new lanes.

The next inflection: Unlike transportation modes such as truckload, ocean shipping and air cargo, warehousing isn't waiting for an inflection point. Overall demand and pricing for industrial space is increasing, and not just in the transportation and distribution sectors. That will keep warehousing capacity tight through 2024 and beyond.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.