The softening economy is finally catching up with the nation’s industrial real estate as a pandemic-fueled boom in warehouse demand shows signs of slowing.

The U.S. industrial vacancy rate ticked up slightly in the third quarter to 3.2% from 3% at midyear as leasing slowed and developers completed a record 148 million square feet of projects, with more than two-thirds of the new space built on speculation without signed tenants, according to Cushman & Wakefield's third-quarter 2022 industrial market report.

Warehouse tenants occupied 108 million square feet in the quarter, down 18% from the prior three months, in the first national quarterly decline in industrial demand since mid-2020, Cushman said. The findings reflect a slowing also seen by CoStar analysts.

The new data indicates that the desire for industrial space, the most in-demand type of commercial real estate since the onset of the pandemic, is finally showing signs of receding after an increase in e-commerce fueled a logistics construction and leasing boom, according to brokers and analysts.

“Some signs are emerging that Amazon's pullback in new leasing, combined with accelerating completions of speculative development projects, is beginning to weigh on the market,” said Adrian Ponsen, U.S. director of industrial analytics for CoStar Group.

A decline in activity was expected after record-breaking leasing and absorption of available space last year and in the first half of 2022 resulted in record-low vacancies, Jason Price, senior research director for Cushman & Wakefield, said in an email.

"With current economic climate coupled with historically tight conditions and robust construction across many markets, it was inevitable that supply would finally outpace demand," Price said. "There's just not a ton of existing space to absorb, so absorption totals were anticipated to moderate some."

Despite the more tempered pace of leasing in recent months, about 359 million square feet of industrial space has been absorbed by tenants in the first nine months of 2022, according to the Cushman report. That's already the second-highest total on record for a full year after 2021's all-time high of more than 500 million square feet leased, Cushman said.

Developers completed building more than 148 million square feet of industrial space in the third quarter, the highest on record for a single quarter, according to Cushman. Just under 350 million square feet was finished in the first nine months of 2022, more than 35% higher than the same time last year, according to Cushman.

Industrial developers remain bullish, however. More than 715 million square feet were under construction across the country in the third quarter, eclipsing the previous all-time high logged three months earlier by 2.6%, according to the Cushman report.

Ten markets have more than 20 million square feet under construction, including Dallas, Atlanta, Phoenix, Southern California's Inland Empire and Indianapolis, according to Cushman.

"With the development pipeline at an all-time high, observing individual markets for signs of oversupply will be extremely important," Cushman said in the report. "As of now, it is not an immediate risk, but one to keep an eye on, given the record supply moving into a period of economic uncertainty."

The amount of existing industrial space listed as available for lease, which plummeted in 2021 and hovered at record lows earlier this year, “inched up very slightly in the third quarter,” CoStar's Ponsen said.

Despite the recent uptick in available space, industrial leasing has held up remarkably well in recent months, even as rising inflation and interest rates have begun to wear on the broader economy, Ponsen said.

Preliminary numbers show a total of 320 million square feet leased during the third quarter, in line with the record-high levels logged each quarter since the beginning of last year, and up more than 60% from the third-quarter leasing average during the three years prior to the pandemic, Ponsen added.

Some industrial tenants have pulled back on expanding their logistics networks, but many others are still planning to expand their footprints, Matthew Walaszek, a Chicago-based research director for CBRE specializing in industrial and logistics property, told CoStar News.

Industrial rents that have increased more than 15% year over year across the United States could be causing some tenants to rethink expansion, he said. Average rents have increased much as 72% over the past year in such tight markets as Southern California, which has among the lowest vacancy rates in the county at around 2%, he added.

"Sticker shock is real," Walaszek said. "Tenants are paying much higher rents and it has impacted the market, with some softening in leasing activity."