The completion of new industrial projects begun during the pandemic's surge in warehouse demand is expected to combine with a slowing economy to drive up the vacancy rate across the country this year.

Brokerage CBRE projects a 10% to 15% decline in leasing as some businesses delay or cancel expansion plans or trim their storage needs by clearing excess inventory in a softening economy.

The wave of nearly 1 billion square feet of warehouse space slated to finish construction in coming months won't allow the national vacancy rate that's been hovering near an all-time low of 4% to fall further in coming months, following years of increased demand, according to CoStar’s latest national industrial report.

"We’re just not going to see the same level and the volume of leasing activity," as in 2022, CBRE head of industrial and logistics research James Breeze said in an email. "It’s still going to be a very good year, maybe the third-best year on record."

At the same time, the number of new starts for warehouse projects is projected to drop to a seven-year low in 2023, according to a new report by Prologis, the world’s biggest warehouse owner, developer and operator.

Such a severe construction pullback would cause a warehouse shortage in 2024, according to the San Francisco-based real estate investment trust.

Fewer new warehouses are likely to break ground in the coming year in Southern California's Inland Empire, one of the nation's largest and most active industrial markets, Avison Young Principal Cody Lerner told CoStar.

Community backlash against warehouse development and truck traffic near residential neighborhoods has already started to affect decisions by industrial developers in the Inland Empire, where several cities have proposed or enacted restrictions on warehouse development, Lerner said.

“The reduced development starts won't be due to a lack of demand," said Lerner, an industrial broker based in Avison Young’s office in Ontario, California. "There’s still plenty of tenant and buyer demand. It’s more about the challenges of entitling and building on land sites that are also becoming more scarce."

Amazon announced this year that it planned to shrink its industrial footprint across the country, but the e-commerce giant has continued to build fulfillment centers around the United States and buy land for future development.

In many cases, the pullback by large companies such as Amazon has opened the door for other distribution tenants, including third-party logistics firms, which have helped prop up leasing, CBRE's Breeze said.

Third-party firms are expected to increase from 34% of the logistics market this year to 40% in 2023 as more companies outsource their distribution for a variety of reasons that include difficulty in finding warehouse space, labor shortages or uncertainty about the economy, Breeze said.

In short, there's plenty of demand carrying over in the coming year, Matthew Walaszek, a research director for CBRE specializing in industrial and logistics property, told CoStar.

"The majority of the markets still have tight market conditions and low vacancy, with virtually no space available in markets like Southern California's Inland Empire," Walaszek said. "We can’t really point to any market that’s getting overheated or oversupplied, but we’re tracking that closely."

As the record industrial rent growth finally begins to slow, it may have a threshold provided by businesses that have been unwilling or unable to pay the high rates, Aaron Ahlburn, head of Avison Young's logistics and industrial data practice, told CoStar News.

“Even mid-scale reductions in leasing activity could open up opportunities for other tenants that have been pushed into rental pricing sticker shock," Ahlburn said. "That could provide a release valve for pent-up demand that has been building over the last few years."