What the 2022-2024 Absorption Deceleration Actually Means
Industrial net absorption hit historically elevated levels in 2021 and 2022, driven by pandemic-era e-commerce pull-forward demand, inventory restocking, and third-party logistics expansion. The numbers were genuinely unusual — annual net absorption in major logistics markets was running at 2-3x historical averages in some corridors. Developers responded, as they always do, by building. That supply response — committed in 2021-2022 at projected rents and cap rates that no longer hold — is what the market is working through now.
Net absorption in 2023-2024 decelerated substantially but did not turn uniformly negative. The distinction matters for acquisition underwriting: a market with positive but decelerating absorption tells a different story than one with negative net absorption. Deceleration means demand growth is slowing relative to supply delivery; negative net absorption means occupiers are actually giving space back.
Several major logistics markets — parts of the Inland Empire, certain Lehigh Valley submarkets, sections of the Dallas-Fort Worth Metroplex — saw net absorption turn negative for multiple consecutive quarters in 2023-2024 as big-box deliveries outpaced demand. Others, particularly smaller-bay and cold-storage submarkets, held up considerably better because new supply didn't chase those demand segments as aggressively.
Big-Box vs. Small-Bay: A Market Within a Market
The industrial market is not monolithic, and much of the absorption data cited in market reports reflects the big-box segment — facilities above 200,000 SF, often 500,000-1,000,000 SF — which dominated the 2019-2022 development cycle. These large distribution centers and fulfillment facilities for e-commerce operators and 3PLs are where the supply overhang is concentrated.
Small-bay industrial — generally defined as facilities under 50,000 SF, often in the 5,000-30,000 SF range — has a fundamentally different supply dynamic. The sites required for small-bay development are scarcer in infill locations, the economics of small-bay development are different, and the tenant base is more fragmented (local distributors, light manufacturers, last-mile operators, construction trades). Small-bay vacancy in most urban infill markets has remained tighter than big-box vacancy throughout the 2023-2024 period of big-box absorption weakness.
An acquisition model for a 25,000 SF multi-tenant industrial building in an infill submarket should not use the same absorption rate assumptions as a model for a 600,000 SF single-tenant big-box distribution center in an exurban logistics corridor. The market dynamics are different, the tenant credit profile is different, and the supply pipeline overhang is different. Applying aggregate market statistics to individual assets without this disaggregation is one of the more common analytical shortcuts that leads to wrong conclusions.
Reading Rent PSF Trends: In-Place vs. Market
Industrial rent growth was dramatic in the 2020-2023 period — asking rents in premier logistics submarkets in many cases doubled from 2018 to 2023. The challenge for acquisition teams looking at industrial assets today is that the rent roll may reflect leases signed in 2018-2020 at $4-6 PSF NNN, while current market asking rents in the same submarket might be in the $8-12 PSF range (or, in some coastal infill markets, higher).
This creates a substantial below-market lease situation on assets with long-term tenants who locked in rents during a lower-rent environment. The gap between in-place rent and market rent has to be modeled carefully — it's a potential value-add story at lease rollover, but it also means the current NOI doesn't reflect what the asset would generate at stabilization under current market conditions.
Consider a 180,000 SF single-tenant industrial building in a mid-Atlantic distribution corridor with a lease signed in early 2020 at $5.40 PSF NNN, running through mid-2027 with one 5-year renewal option at a fixed 3% annual bump. Current market asking rents in the submarket are approximately $9.80 PSF NNN. The in-place NOI on this asset looks modest relative to the square footage; the upside story is entirely predicated on what happens at lease expiration in 2027. Underwriting that story requires a clear-eyed view of whether the tenant renews (at what looks like a significant below-market option rate), whether absorption in the submarket will support a re-leasing at or near market rent, and how much downtime and TI expense a re-leasing scenario would require.
Supply Pipeline Visibility and How to Use It
The supply pipeline for industrial is more transparent than for most asset classes — large-scale construction projects require permits, have visible construction periods, and are tracked by commercial data providers. The question for acquisition underwriting isn't whether the pipeline exists, but how to translate it into lease-up and rent growth assumptions.
Pipeline metrics to track for a given submarket: total SF under construction, total SF in permit or pre-permit, percentage of under-construction SF that is pre-leased, and projected delivery schedule. A market with 8 million SF under construction that is 80% pre-leased is a very different supply picture than one with 8 million SF under construction that is 30% pre-leased.
We're not saying supply pipeline data tells the full story — it doesn't. Pre-leased doesn't mean the tenants won't sublease if their business conditions change (one of the absorption stories of 2022-2023 was large logistics tenants subleasing space they had committed to before pandemic-era demand normalized). But it does tell you something about the floor on demand for new supply, and that should inform how you stress-test rent growth in years 2-5 of the acquisition model.
Cold Storage and Specialty Industrial: Different Underwriting Parameters
Cold-storage industrial and food-grade distribution facilities require a different underwriting framework than conventional dry warehouse. The structural characteristics — refrigerated dock doors, ammonia or glycol refrigeration systems, reinforced floors for pallet rack loads — are expensive to build and expensive to convert. That means tenants in cold-storage facilities face much higher switching costs than tenants in conventional warehouse space, which supports WALT and lease renewal probability assumptions.
Vacancy in cold-storage submarkets has tracked tighter than conventional industrial through the 2023-2024 deceleration. Rent PSF for temperature-controlled space also carries a significant premium — commonly $3-8 PSF above comparable dry warehouse on a NNN basis, depending on the refrigeration specification and market. That premium reflects both the operating cost pass-through structure and the scarcity of purpose-built facilities.
The underwriting challenge with cold storage is the capital expenditure exposure on mechanical systems. Refrigeration equipment has a defined useful life, and an acquisition model that doesn't budget for compressor replacement or refrigerant conversion (particularly relevant given phasedown timelines for high-GWP refrigerants under EPA regulations) will understate the true ownership costs.
Adjusting Underwriting Assumptions for the Current Cycle
For industrial acquisitions in the current environment, several adjustments to standard underwriting assumptions are warranted relative to 2020-2022 norms.
Rent growth: Dial back aggressive rent growth assumptions in big-box segments. The 15-25% annual rent growth seen in 2021-2022 was cyclically elevated and is not a reasonable forward assumption in most markets. For underwriting purposes, 2-4% annual rent growth for years 1-5 in major logistics markets is a more defensible base case; stress-test flat rent growth and -5% on any near-term lease rollover.
Lease-up downtime: Model 6-12 months of downtime on any lease roll in a market with meaningful supply pipeline. Big-box tenants have more options today than they did in 2021, and the broker community will remind you of that in every LOI negotiation.
TI and leasing commissions: Even in NNN industrial, tenants in a well-supplied market can negotiate TI on renewals. Budget for modest TI allowances on renewals in supply-heavy submarkets; it's no longer unusual to see first-generation warehouse tenants asking for dock door upgrades or LED lighting retrofits as a renewal condition.
Exit cap: The compression-era assumption of exiting industrial at 50 bps over going-in is no longer conservative in most markets. Model 75-100 bps expansion from current going-in levels for anything with near-term lease rollover exposure in a supply-heavy submarket.
Industrial remains a structurally sound asset class with long-term demand tailwinds from e-commerce, nearshoring, and infrastructure investment. But those structural tailwinds don't override cycle-level supply dynamics in the near term, and acquisition models that don't account for the current cycle will generate return projections that look better on paper than they'll produce in reality.
