Spec vs Build-To-Suit Development Ratio Reflects the Changing Industrial Market

Of the 10 new industrial construction starts in Q1, six were build-to-suit projects, making up 2.3M SF of the 2.7M SF that broke ground in the quarter, according to a Q1 2024 industrial report from NAI Hiffman. In total, 13.4M SF of industrial properties are currently under construction as of the start of Q2, with spec projects making up 7.4M SF of active projects, or 55.3%, data from NAI Hiffman shows.

This is a marked contrast from the first quarter of 2023, when developers were building 41.2M SF of industrial properties, with 81% going up as speculative buildings and 19% as build-to-suit facilities, according to NAI Hiffman.

“We’ve started to see a shift in the strategic direction of developers and their attitudes towards new construction, with developers adopting a more conservative approach,” said Nick Schlanger, director of research services at NAI Hiffman.

Vacancy rates for industrial properties have continued to tick up over the past several quarters, settling at 5.7% as of Q1, according to NAI Hiffman. Since the first quarter of 2023, developers have completed 37.6M SF of industrial property, with 24.5M SF still available and 13.1M SF sold or leased.

Developers are now more likely to wait to sign a major tenant before breaking ground on a new industrial project, Schlanger said. In recent years, the “unabated” demand for industrial space from large, big-box industrial tenants led to developers flooding the market with spec developments, he said.

“Space was just flying off the shelves,” Schlanger said. “It was really a ‘if you build it, they will come’ mentality. And we saw that product lease very well. But now we’re seeing a pullback in demand from those major tenants, and developers have adjusted.”

Schlanger said developers are being realistic about current levels of demand and not speculating on potential growth that might come over the next 24 months. He said this is a marked contrast to a metro like Dallas, which has triple the amount of inventory currently under construction that Chicago does despite a 9.5% vacancy rate.

Local developers are taking less risk than those in other markets, Schlanger said.

Looking to the future, Schlanger said new supply expected to come online in 2024 is still anticipated to outpace demand by about 5M SF. However, with a slowdown in new construction starts, demand for space may overtake supply in the back half of next year.

“I think we’re going to start to see over the second half of 2025 is really when demand will likely begin to outpace that new supply as most everything will be delivered by that point,” Schlanger said.