2025 U.S. Industrial Real Estate Outlook: E-Commerce Boom and Logistics Expansion

Executive Summary

• Market Cooling After Frenzied Growth: The U.S. industrial real estate sector in mid-2025 is experiencing a moderate cooldown after the pandemic-era boom. Vacancy rates have climbed to a decade high (~7.4%) as of Q3 2025 – up from historic lows under 4% in 2022 – amid nearly three years of supply outpacing demand. Softer market conditions have shifted bargaining power towards tenants, with annual rent growth slowing to just 1.6%, the weakest since 2012. In fact, national asking rents are now flattening (0% QoQ in mid-2025), indicating a turning point from the rapid increases of recent years.

• Macroeconomic Headwinds: Broader economic forces are tempering industrial demand. Consumer spending growth is projected to slow considerably in 2025, and import volumes have pulled back due to ongoing U.S.–China trade frictions. High inflation in 2021–2022 prompted aggressive Federal Reserve tightening, and interest rates remain elevated, raising occupiers’ costs and cooling expansion plans. If a mild recession materializes, vacancy could push into the 8–9% range and cause the first national rent decline since 2009. The base-case outlook, however, assumes a soft landing – a modest economic expansion that lets vacancy peak under 8% in late 2025 before improving in 2026.

• Divergent Performance by Industrial Subsector: Not all industrial properties are affected equally. Modern logistics facilities (warehouses and distribution centers) have seen the sharpest slackening – their vacancy rates have jumped ~460 bps since 2022, reaching roughly 8–8.5% by mid-2025. This is largely due to a record construction wave of large fulfillment centers. In contrast, specialized industrial (manufacturing) space remains tight at ~4% vacancy – only about 110 bps above its historic lows. Flex industrial (smaller industrial/office hybrid space) sits in between, with vacancy around 8% (up ~210 bps from its low). Rent trends mirror these fundamentals: big-box logistics rents have even seen slight declines in some markets, while small-bay and specialized industrial rents are holding firmer due to limited new supply.

• E-Commerce Boom Driving Logistics Demand (and Challenges): The structural rise of e-commerce continues to underpin robust long-term demand for warehouses. Online sales now account for roughly 16% of U.S. retail (Q1 2025), up from about 11% in 2019. Retailers and 3PLs have responded with major investments in distribution networks to enable faster delivery and higher inventory levels, fueling an unprecedented expansion of logistics infrastructure. This e-commerce boom has been a double-edged sword: it created a surge in occupier demand (with record net absorption of 500+ million SF in 2021–2022) but also encouraged developers to build at record pace, leading to temporary oversupply in some big-box warehouse markets. Last-mile distribution facilities near population centers are especially sought after as consumers expect same-day delivery, keeping small urban warehouses in short supply even as big rural fulfillment centers see higher vacancies.

• Developer Pullback and Construction Trends: Developers are pumping the brakes. After peaking in 2022, new construction starts have fallen to 10-year lows as of early 2025. Rising vacancy and higher exit cap rates (now ~6% vs. mid-4% two years ago) have made speculative projects less attractive. Many markets are still working through a record pipeline of projects underway – nearly 297 million SF nationally – but net new supply is forecast to drop sharply by 2026 (to an 11-year low). This pullback is healthiest in overbuilt areas: Sunbelt distribution hubs like Austin, Indianapolis, Greenville, Phoenix, and San Antonio face a prolonged absorption period for vacant new warehouses and developers have largely paused speculative building there. In supply-constrained coastal markets, by contrast, construction never fully caught up to demand – those markets remain relatively tight and any new infill development still sees strong pre-leasing.

• Investor Sentiment and Capital Markets: Despite higher interest rates, industrial real estate remains a favored asset class for investors, supported by its strong fundamentals and dependable income. Investment sales volumes rebounded by +14% in 2024 to ~$68 billion, returning to pre-pandemic (2019) levels. That momentum carried into early 2025, with Q1 transaction volume up 25% year-over-year as buyers adapted to the new pricing environment. Cap rates have expanded ~150 bps from their 2021 lows, now averaging around the 6% range for stabilized multi-tenant warehouse assets (vs. ~4.5% at the peak). Consequently, valuations are ~20–25% off peak highs, but the recalibration has lured opportunistic capital back into the market. Notably, large deals ($50M–$100M+) surged in early 2025, driven by institutional buyers’ renewed confidence. Private investors continue to dominate smaller deals and are selectively active in bigger transactions as well. Users (occupiers) are also increasingly purchasing facilities to lock in their supply chain needs – e.g. a major retailer just acquired its own 1 million SF distribution center for ~$289/SF as a strategic expansion move. While caution lingers (trade uncertainty or credit conditions could still curb deal-making), capital is expected to continue favoring industrial assets long-term due to the sector’s superior rent growth and resiliency.

• Forward Outlook – Cautious Optimism with Risks: The consensus view for 2025–2026 is one of gradual stabilization. Supply-demand balance should improve as the construction wave subsides – by 2026 net new deliveries are projected to fall below annual absorption, easing upward pressure on vacancy. Under a baseline scenario of no recession, expect vacancy to peak near 8% in late 2025 and then trend down toward the mid-6% range over the next few years, still above the record-tight sub-5% levels of 2021. Rent growth is likely to remain modest (1–3% annually) in the near term given high vacancy and recent huge rent run-ups that tenants are still digesting. However, rent declines should be limited to certain overbuilt segments, and many tenants will continue to face mark-to-market rent increases upon renewal due to the gap between expiring (lower) rents and today’s asking rents in core locations. Key risks to the outlook include a potential downturn in consumer spending (which would weaken warehouse demand), trade policy shocks (tariffs or geopolitical events that disrupt supply chains), and the trajectory of inflation/interest rates (a jump in financing costs could further dampen development and investment). On the upside, continued growth in e-commerce, on-shoring of manufacturing, or an early end to monetary tightening could boost demand beyond forecasts. Overall, industrial real estate stakeholders should prepare for a more normalized, sustainable growth phase – a shift from the frenetic boom, yet still supported by powerful long-term drivers in e-commerce and supply chain reconfiguration.

  
  

Macroeconomic & Market Overview

After several years of extraordinary expansion, the industrial property market in 2025 finds itself navigating a more challenging macroeconomic landscape. Major economic indicators have downshifted, directly impacting industrial real estate performance. Consumer spending – a primary driver of logistics demand – is slowing in 2025, with Oxford Economics projecting retail sales growth to remain positive but “slow considerably” compared to the past two years. High inflation through 2022 prompted aggressive interest rate hikes, and those elevated borrowing costs are now tempering business investment and expansion plans (e.g. some warehouse occupiers tied to housing, furniture, and building materials are contracting as high mortgage rates cool the housing market). At the same time, global trade uncertainties have emerged as a headwind – the ongoing U.S.–China tariff conflict escalated in early 2025, contributing to a sharp drop in imports at major U.S. seaports in May. Trade policy friction not only raises costs but also creates demand volatility for distribution space, particularly in port-dependent logistics hubs.

Against this backdrop, nationwide industrial property metrics have loosened from the ultra-tight conditions of the 2020-2022 boom. The national vacancy rate has increased to 7.4% as of Q3 2025, more than double its 2022 low (≈3.8%). This marks the highest vacancy level in roughly a decade, reflecting nearly three years of supply additions outpacing the deceleration in demand. Net absorption – while still positive on an annualized basis – has moderated significantly. In fact, only ~18.9 million SF were absorbed in Q1 2025, and absorption totals have trended downward for four consecutive quarters. By Q2 2025, preliminary data even showed a quarterly net absorption turning slightly negative (–12.6 million SF) as new vacancies outstripped move-ins. Put simply, the once relentless tenant appetite for space has eased, at the same time that record amounts of new supply are hitting the market.

Notably, available sublease space – a key barometer of softening demand – has also ticked up. Sublease availability now equates to about 1.1% of total inventory (an historically high level), as some firms (especially those that expanded aggressively in 2021) are rightsizing and putting excess space back on the market. Overall availability (which includes vacant space plus occupied space being marketed for lease) stands at 9.6% nationwide. This indicates additional “shadow supply” beyond the vacant stock, portending further vacancy pressure in the near term. Moreover, the velocity of leasing has slowed – in Q1 2025, the median time an industrial space sat on the market before leasing was over 5 months, roughly double the brisk 3.5-month turnover seen just a few years prior. Conditions have shifted in tenants’ favor, a reversal from the landlord-favorable environment at the height of the pandemic, when spaces would lease almost as soon as they delivered.

The rental rate environment has correspondingly cooled. After several years of blistering growth (industrial rents jumped nearly 10% year-over-year at the 2022 peak), asking rent growth has downshifted to just +1.6% year-over-year as of mid-2025 – the slowest pace since 2012. On a quarterly basis, rent growth is effectively flat (0% in the most recent quarter), indicating that landlords are holding rents steady and even granting more concessions to attract tenants. Inflation-adjusted (real) rent growth is likely negative at this point given broader price inflation, a notable change from the outsized real rent gains of 2020–2022. Still, it’s important to note that rent levels remain very high in absolute terms after the pandemic surge – many tenants coming off long-term leases are facing substantial uplifts to “market” rents upon renewal. This mark-to-market effect means some landlords can achieve rent bumps on renewals even in a slower market, particularly for smaller spaces that saw big rent run-ups during the boom.

From a macroeconomic risk perspective, industry strategists are war-gaming a range of scenarios for the next 12–24 months. The baseline outlook assumes the U.S. avoids a recession: economic growth continues at a subdued pace, and the Federal Reserve holds interest rates relatively high in the near term before a possible easing in late 2025 if inflation abates. Under this scenario, industrial demand should keep growing (albeit modestly) and vacancy would likely top out below 8% by end-2025, then gradually improve through 2026. Rental rates in this soft-landing case are expected to plateau rather than plunge – effective rents could see 0–2% annual growth for a year or two as the market recalibrates, with stronger growth resuming once excess supply is absorbed.

In a downside scenario where a mild recession hits (for example, if inflationary pressures force even tighter monetary policy or consumer spending pulls back sharply), the industrial sector would face a further hit to absorption. Vacancy could rise into the high-8% range nationally, and for the first time since the Great Recession we might witness a year-over-year decline in average industrial rents. This scenario implies a higher volume of rent concessions and landlord competition to fill space, especially in oversupplied big-box segments. Markets heavily tied to global trade (West Coast port markets) would be most vulnerable, as a continued slump in import volumes or export-oriented manufacturing would directly curtail warehouse demand. Indeed, industrial brokers in port-centric regions are already wary – with imports down and tariffs raising costs, some warehouse tenants are delaying decisions or shrinking requirements. Another risk factor on the horizon is geopolitical instability (e.g. potential disruptions in global supply chains from conflicts or new trade barriers), which could impact both tenant demand and construction material costs.

On balance, the 2025 macro outlook for industrial real estate is one of cautious optimism tempered by clear risks. The sector’s fundamentals are normalizing after a period of extreme outlier growth. While the short-term adjustments are significant – higher vacancies, slower rent growth – these conditions also sow the seeds for a healthier, more sustainable market ahead, as we explore in the following sections.

Sector Performance: Logistics, Flex, and Specialized Industrial

Not all industrial real estate is created equal. The sector comprises multiple sub-types – logistics (warehouse/distribution), specialized industrial (manufacturing, heavy industrial, or specialized facilities), and flex (flexible industrial/office spaces) – each with distinct demand drivers and recent performance trends. In 2025, these segments are experiencing the market slowdown to varying degrees, with logistics-focused properties seeing the most pronounced effects of oversupply, while specialized and flex spaces demonstrate relatively more resilience in some aspects.

Logistics Warehouses & Distribution Centers: This category, which includes large fulfillment centers and bulk distribution warehouses, has been the primary engine of industrial growth in recent years – and it is where the e-commerce boom collided with the development boom most directly. Logistics properties make up the majority of U.S. industrial inventory (approximately 13.35 billion SF nationally) and house functions like e-commerce fulfillment, retail distribution, and third-party logistics operations. As of mid-2025, the logistics subsector’s vacancy rate has risen to about 8.4%, significantly above the national average and up from roughly 4% at its low point in 2021. This jump in vacancy (on the order of +460 basis points since mid-2022) is the steepest among industrial sub-types. The surge is attributable to record levels of new supply: developers added millions of square feet of warehouse space in anticipation of e-commerce demand, especially in big-box formats. In fact, the stock of mid-sized logistics buildings (100,000–500,000 SF) expanded by over 14% in the past four years alone. Many of these new deliveries hit the market just as demand growth decelerated, pushing vacancy of 100–500k SF warehouses above 10% – its highest level in over a decade. The net result has been negative net absorption in the logistics segment recently. In the first half of 2025, occupancy losses in logistics facilities totaled several million SF (–7.2 million SF in the latest quarter alone), indicating move-outs and new vacant deliveries outnumbered new move-ins. Rent growth for big-box logistics space has accordingly stalled and in some cases reversed. Asking rents for large distribution centers have come under downward pressure in certain markets, especially where availability is abundant. For example, it’s reported that some newly built mega-warehouses in oversupplied hubs are leasing at discounts or with increased free rent incentives, a stark change from the landlord-favorable conditions a year or two ago.

Importantly, not all logistics real estate is soft – performance is bifurcated by size and location. Smaller “last-touch” facilities and infill urban warehouses remain highly sought after. Small-bay industrial buildings (under 50,000 SF) have a sub-4% vacancy rate on average, near pre-pandemic record lows, thanks to chronically limited supply and steady demand from local distributors, construction trades, and service providers. These smaller spaces also lease up much faster – a vacant sub-50k SF space in 2025 typically finds a tenant in under 5 months (median), compared to nearly 11–13 months for a 50–100k SF or 100k+ SF space. This illustrates how last-mile distribution and smaller-format warehouses are absorbing better than the giant fulfillment centers. Additionally, certain high-density coastal markets (where adding new logistics space is difficult) are still relatively tight. For instance, Southern California’s infill warehouse vacancies remain low (Los Angeles County is ~6.3% vacant, which is higher than its <3% pre-2023 level, but still well below the national average). Tenant demand persists for well-located logistics facilities that can speed up delivery times to consumers – a testament to the enduring influence of e-commerce on this subsector. Going forward, the logistics segment’s recovery will hinge on how quickly the current development pipeline is absorbed and how much new construction remains on hold until fundamentals improve.

Specialized Industrial (Manufacturing, Cold Storage, etc.): Properties designed for specific industrial uses – such as heavy manufacturing plants, food processing centers, cold storage facilities, data centers, and other special-purpose industrial buildings – form the second major subsector. This segment has exhibited remarkable resilience amid the broader slowdown, owing in part to very limited speculative construction. As of mid-2025, specialized industrial vacancy sits at only 4.2% nationally, up slightly from an ultra-tight trough (around 3% in late 2022). That increase of roughly +110 bps is modest compared to the swing in logistics vacancies. Net absorption for specialized space did turn mildly negative in recent quarters (about –2.7 million SF), reflecting some softness in manufacturing-linked demand as the economy cooled. However, the scale is small – many manufacturing facilities are build-to-suit and remain occupied long-term by the production user. Rents in the specialized category have actually held up well. The average asking rent for specialized industrial is around $11.89/SF, slightly higher than bulk logistics rents, and rent growth is positive year-on-year. The limited availability of modern manufacturing-capable space gives landlords some pricing power, especially for unique assets like semiconductor fabs or pharmaceutical manufacturing sites that are in high-tech growth niches. Another factor supporting this subsector is the policy push for domestic manufacturing: ongoing protectionist and on-shoring trends could increase requirements for U.S. production space if companies localize more of their supply chains. Indeed, segments like electric vehicle plants, microchip facilities (spurred by the CHIPS Act), and defense-related production are expanding in certain regions, providing a tailwind for specialized industrial real estate. While uncertainty around tariffs has created caution, many manufacturers are still reconfiguring for resilience – which sometimes means taking additional industrial space for raw materials storage or assembly near their U.S. plants. Overall, the specialized industrial market in 2025 remains fundamentally tight and relatively landlord-favorable, with any slack likely to be short-lived as broader economic conditions improve.

Flex Industrial (Light Industrial/Flex Space): The flex sector straddles the line between traditional industrial and office, typically offering smaller bay spaces (often under 20,000 SF per unit) with a mix of warehouse, showroom, and office build-out. Flex properties often serve R&D functions, last-mile distribution, small manufacturers, or local service companies. During the pandemic boom, flex benefited from spillover demand as firms scrambled for any kind of space; however, it also saw less new development than logistics, which has helped it maintain stability. As of 2025, flex industrial vacancy is roughly 8.0% nationally, comparable to the logistics subsector and up from ~5.9% at its low. That ~210 bps vacancy rise since the pre-pandemic era is noticeable, but flex’s vacancy is still in a moderate range and many markets report healthy tenant interest for quality flex space. Net absorption in flex turned modestly negative in recent quarters (about –2.7 million SF, similar magnitude to the specialized category). This suggests some consolidation by tenants – for example, tech firms downsizing footprints or small businesses closing during the economic slowdown. Nonetheless, in many metro areas flex space is experiencing steady leasing, especially for last-mile delivery centers (e.g. an e-commerce company taking a 50,000 SF cross-dock facility with some office), and for uses like life-science labs in certain conversions. One distinguishing feature of flex is its higher rents: national flex asking rents average $18.73/SF, significantly above pure warehouse rents. This is due to the office finish (which commands higher rent per foot) and typically more central, infill locations of flex parks. Those higher rents have generally been sustained, as tenants often value the combination of small warehouse space with customer-facing storefront or office.

It’s worth noting that flex performance varies widely by region. In tech-centric markets (e.g. Silicon Valley, parts of Boston), some flex/R&D buildings have seen increased vacancy as tech and biotech firms cut costs in 2023–24. Meanwhile, Sunbelt cities with booming small-business formation (like parts of Florida and the Carolinas) show very tight flex conditions, as new construction of flex space has been scarce and local service companies (contractors, suppliers, etc.) are expanding. For instance, cities such as Nashville, Jacksonville, Orlando, Tampa, and Charlotte report acute shortages of small industrial bays – many under 10,000 SF – as rapid in-migration and housing growth in those areas spur demand from contractors, HVAC installers, e-commerce delivery depots, and others. In such markets, vacancy for small flex units can be under 3–4% and rents are climbing faster than the national average. On the whole, the flex sector in 2025 can be characterized as stable but bifurcated: older, outmoded flex parks or those in struggling office/tech corridors face challenges, while well-located, modern small-unit industrial projects are thriving and even seeing rent growth due to scarcity.

E-Commerce Boom and Logistics Infrastructure Expansion

The e-commerce boom of the past decade – turbocharged by the pandemic – remains a fundamental driver of industrial real estate demand in 2025. Even as overall retail sales growth moderates, the shift of consumer behavior toward online shopping is structural and ongoing. Recent data shows that U.S. e-commerce sales accounted for approximately 16% of total retail in early 2025, up from about 11% five years ago. This rising share of online sales translates directly into heightened requirements for warehouse space, since e-commerce supply chains are far more logistics-intensive (fulfilling individual parcel orders) than store-based retail. In practical terms, every additional $1 billion of e-commerce sales can require an estimated 1 million+ square feet of warehouse space for distribution and fulfillment. Thus, even at a somewhat slower growth rate, e-commerce is adding tens of millions of SF of demand for industrial space each year. For example, the Census Bureau reports online retail grew ~6% year-over-year in Q1 2025 (versus ~4.5% growth for total retail) – this incremental e-commerce activity continues to spur new warehouse leasing, particularly in major distribution corridors.

However, the e-commerce boom’s impact on industrial real estate is multifaceted. The most visible effect was the “Fulfillment Center Frenzy” of 2020–2022, during which e-commerce giants and big-box retailers raced to add huge regional distribution centers. Companies like Amazon, Walmart, Target, and third-party logistics firms signed enormous leases (500,000 SF and above) across the country to expand fulfillment capacity. This drove industrial vacancy to record lows and rent growth to record highs during that period. Now in 2025, we are seeing the after-effects: many of those mammoth facilities were delivered recently, and in some cases the tenants have rationalized their space needs after over-expanding. Amazon, for instance, famously scaled back on expansion plans in 2023 after doubling its logistics footprint in 2020–21 – leading to some vacant new warehouses and sublease offerings in markets like the Inland Empire and Indianapolis. This is a key reason why markets that were darlings of the e-commerce surge (Inland Empire, Phoenix, Atlanta, Central PA, etc.) are experiencing elevated vacancies today. For instance, Phoenix’s vacancy rate for mid-sized logistics buildings shot above 20% after a 19 million SF surge in vacant space since 2019, largely from speculative projects aimed at e-commerce users. Similarly, the Inland Empire – the prime Southern California e-commerce hub – saw vacancy climb from under 2% to roughly 8.4% as of 2025 due to a combination of huge supply additions and a cooling of tenant expansion by Amazon and others. In short, the e-commerce boom initially led to a voracious absorption of space, but also to a development boom that overbuilt some markets in the short run.

Crucially, the long-term trajectory of e-commerce points to sustained demand for logistics real estate, but with a shifting focus toward optimization and speed. Early in the boom, the emphasis was simply on more space – now it is on smarter space. Retailers are reconfiguring networks to enable faster delivery (same-day or next-day service) and to build resilience. This has several implications:

• Last-Mile and Urban Fulfillment: There is heightened demand for smaller distribution centers located closer to end consumers. These facilities (often 20,000–150,000 SF infill warehouses or multistory logistics buildings in dense cities) are critical for services like same-day grocery delivery or rapid e-commerce parcel delivery. Even as some large regional centers sit half-empty, last-mile hubs are often overflowing with activity and commanding premium rents. For example, in New York City and the inner boroughs, modern multistory warehouses that opened in 2022–2023 (a direct response to e-commerce logistics needs) leased quickly and at rents significantly above the national average. A scarcity of suitable infill sites means developers are even repurposing obsolete retail or aging industrial buildings into last-mile distribution centers. This trend is keeping small urban warehouse vacancy extremely low (often <3% in land-constrained metros) and is a bright spot for industrial owners.

• Distributed Logistics Networks: Many big retailers and e-tailers are moving away from relying only on a few giant regional warehouses. Instead, they’re adopting distributed network strategies, using a larger number of mid-sized facilities spread across markets to position inventory closer to customers. This strategy, known as “omnichannel” or “hub-and-spoke” distribution, has led to secondary markets seeing an outsized boost. We saw evidence of this in Q1 2025 leasing activity: mid-tier markets like St. Louis, Columbus, Nashville, Greenville, and Memphis all recorded new leasing volumes more than 50% above their recent averages as companies secured space in these locations. These are often e-commerce or retail players adding nodes to their logistics networks to improve delivery times and diversify risk (for instance, bypassing coastal port congestion by positioning inventory in the Midwest/South). Such moves spread warehouse demand beyond the traditional “big five” distribution hubs, benefiting a wider array of regional markets.

• Logistics Infrastructure Investments: The e-commerce boom isn’t just about warehouses; it’s also spurring broader infrastructure expansion. High-volume parcel hubs, sortation centers, truck terminals, and intermodal facilities have been growing to support the flow of goods. Warehouse developers closely follow these investments. For example, new intermodal rail facilities or highway improvements can turn certain submarkets into hot logistics nodes. In 2025, we observe strong development around infrastructure assets like the Savannah port (where distribution space serves booming East Coast import volumes) and around mega-hub airports (e.g. the area near CVG airport in Kentucky is thriving thanks to Amazon’s air hub). The expansion of such logistics infrastructure underpins future warehouse demand – industrial developers are actively aligning projects near improved ports, rail ramps, and highways to cater to e-commerce supply chains.

• Consumer Expectations and Inventory Strategy: Today’s consumers expect a vast selection of products with rapid delivery and easy returns. Retailers in turn must hold more inventory closer to population centers and build reverse logistics capabilities. This dynamic has increased the inventory-to-sales ratio for many companies, meaning they require additional warehouse space to store safety stock and process returns. Even as some firms optimized inventories in late 2022 (temporarily reducing space needs), the structural need for buffer stock and return centers remains higher than pre-ecommerce era. For instance, a fashion retailer fulfilling online orders needs not only distribution centers but also separate facilities to handle returns/refurbishment. All these functions boost demand for industrial square footage.

  
  

Given these trends, developers and investors remain bullish on logistics real estate tied to e-commerce, but with more nuance than a few years ago. No longer is it a rising tide that lifts all boats – instead, location and functionality are paramount. State-of-the-art fulfillment centers in strategic logistics corridors (with proximity to labor, transportation, and consumers) will continue to lease well. In contrast, generic warehouses in oversupplied exurban parks might languish. Retailers are also increasingly concerned with supply chain resilience – for example, diversifying sourcing and holding extra critical stock onshore to avoid the kind of disruptions seen in 2020. This could generate demand for additional warehouse space for domestic manufacturing inputs and spare parts (a positive for specialized and general warehouse space alike).

On the flip side, if consumer spending were to falter significantly or if e-commerce growth stalls, there could be a period of indigestion for the logistics real estate sector. Already, we see tenants using caution in 2025, expanding only as needed rather than hoarding surplus space. Nonetheless, the secular shift toward e-commerce is far from over, and by all indications, it will remain a powerful engine of industrial real estate growth. The near-term challenge for the industry is to adapt to the current growth rate of e-commerce (which is healthy but not as frenetic as 2020) and avoid overbuilding, while positioning to serve the future growth (which could accelerate again, especially as technologies like mobile commerce, drone delivery, and omnichannel retail mature).

In summary, the e-commerce boom has permanently elevated the importance of logistics infrastructure. Warehousing and distribution are now mission-critical components of the retail ecosystem. For industrial developers and investors, this means that assets supporting e-commerce – whether gigantic fulfillment centers or small last-mile depots – will continue to offer strong long-term fundamentals, even though the sector may experience short-term cycles of oversupply like the one we are navigating in 2025.

Developer and Investor Responses

Construction Pipeline and Developer Strategies

Industrial developers over the past few years rode an unprecedented wave of demand, delivering new supply at a breakneck pace. By late 2023, annual completions of industrial space nationally hit an all-time high (around 150 million SF delivered in Q4 2023 alone, equal to 0.8% of inventory in that quarter). This surge was led by speculative projects, particularly in low-barrier markets with ample land. As we enter the second half of 2025, the picture has changed dramatically: new construction starts have plummeted to a 10-year low. Developers have pivoted from “build as much as possible” to a far more cautious approach, scaling back plans in response to the softer market conditions.

Several factors prompted this sharp pullback in development:

• Soaring Vacancy and Absorption Slowdown: Developers keenly watch occupancy trends. The fact that vacancy has risen and net absorption has slowed to a trickle by 2025 signaled a clear oversupply risk, particularly in the big-box warehouse segment. In markets where dozens of spec projects were underway, landlords suddenly found themselves competing for fewer tenants. This imbalance compelled developers to hit the brakes on new groundbreakings to avoid adding fuel to the fire.

• Higher Exit Cap Rates and Financing Costs: The financial calculus for development became less favorable. Two years ago, an investor could underwrite an industrial project at a 4.5% exit cap rate, but now exit cap rates are assumed around 6% or higher in many markets. That compressed the expected value of completed projects by 20–30%, wiping out profit margins for some deals underwritten at peak pricing. Simultaneously, construction financing became more expensive as the Fed raised interest rates. Many banks also tightened lending standards for commercial real estate in 2023–24. So the combination of rising cap rates and costlier debt has made it much harder for new developments to pencil out financially. Marginal projects were shelved, and even solid projects faced delays as developers sought to renegotiate construction costs or financing terms.

• Construction Cost Inflation and Supply Chain: Building industrial facilities became costlier and more challenging during the pandemic (due to materials and labor inflation). While some pressures have eased, overall construction costs remain elevated compared to pre-pandemic levels. High costs mean higher break-even rents for developers. With rent growth now stalled, many developers cannot justify starting speculative projects unless they have confidence in achieving premium rents or significant tenant pre-commitments. This has particularly curtailed speculative big-box construction.

  
  

As a result of these forces, the industrial construction pipeline is thinning out. Many projects that began in 2022 and early 2023 are still completing (hence 2024–25 deliveries remain high), but few new ones are being launched. By early 2026, new completions are forecast to fall to their lowest annual level in over a decade. This forthcoming dip in supply will help the market rebalance by late 2025 and beyond. On average, it takes roughly 14–15 months to build a large warehouse, so the starts that hit 10-year lows in late 2024 will translate to a drought of deliveries in late 2025/early 2026.

Importantly, the slowdown in construction is not uniform across geographies or product types. Developers are still proceeding with projects that have strong fundamentals or pre-leases. Build-to-suit developments (where a tenant has signed on in advance) remain active – for instance, companies in need of custom manufacturing facilities or big e-commerce players still doing strategic expansions. Also, some specialized facilities like cold storage or truck terminals are seeing niche development because demand is outstripping supply in those categories. But the speculative 500,000 SF warehouse with no tenant lined up – a very common project type in 2020–22 – has become rare in 2025.

We can see evidence of where developers are most concerned about oversupply. The MMCG Industrial National Report flags certain Sunbelt and Midwest markets as having particularly large supply waves still working through the system. Austin, Indianapolis, Greenville-Spartanburg, Phoenix, and San Antonio are cited as markets where record amounts of new space are delivering and could take more than two years to absorb given current demand levels. These are generally markets that enjoyed huge investor enthusiasm recently (often due to business-friendly conditions and population growth) and thus got flooded with new warehouses. Tenants in those regions now have abundant choices and can be picky, meaning lease-up times for new projects are extending. In Phoenix, for example, speculative construction between 100k–500k SF has been so prolific that vacancy in that size cohort hit ~20%, with another 8.2 million SF still underway as of mid-2025. The report calculates that even if no further projects start, it would take roughly 3 years for Phoenix’s mid-sized warehouse vacancy to normalize to pre-boom levels, assuming absorption matches its past 5-year average. Those kinds of sobering stats are prompting developers and their equity backers to refrain from breaking ground until the glut subsides.

In contrast, in coastal gateway markets or land-constrained urban areas, developers see far less risk of oversupply (in fact, demand still exceeds supply in some of those locales). For example, the New Jersey/New York region has a significant amount of space under construction relative to its recent absorption (with an under-construction to absorption ratio of 9.6, indicating a potential surge of new supply). Yet, due to the scarcity of land and enduring tenant demand, many of those projects are being delivered partially or fully pre-leased, and developers remain interested in well-located sites (e.g., multi-story projects near Brooklyn or infill sites in Northern New Jersey). Similarly, Southern California’s Inland Empire, while currently working through elevated vacancy, still has long-term constraints (land and regulation) that keep developers cautiously optimistic about projects that will deliver after 2025.

From a strategic standpoint, developers are adjusting their product focus in 2025. Some notable trends include:

• Smaller Unit Development: Given the strength in small-bay demand, a few developers are shifting from mega-warehouses to industrial business parks with smaller units (5,000–50,000 SF bays). These had been underbuilt for years. Now, projects that cater to multiple smaller tenants (through demisable space or flex units) are gaining favor as they tap into that underserved segment with sub-5% vacancy.

• Upgrading and Redeveloping: Rather than new greenfield builds, some firms are investing in value-add opportunities – acquiring older industrial properties to renovate or repurpose, confident that improved product will lease in a market where new construction is scant. For example, converting older heavy manufacturing sites to modern logistics use, or tearing down obsolete low-density sites to build a new warehouse, albeit at measured pace.

• ESG and Automation Features: Developers are also differentiating new projects with features like sustainable design (solar panels, EV truck charging yards) and high-spec automation readiness (extra power, higher clear heights for robotics, etc.). The bet is that even if overall demand is cooler now, tenants will gravitate to best-in-class facilities that drive efficiency for their operations, allowing top projects to outperform the market.

  
  

In summary, industrial construction is entering a needed cooldown phase in 2025, after an extraordinary build-out. This pause should ultimately benefit market health – preventing more oversupply and allowing demand to catch up. Developers that do build in this environment are doing so with greater scrutiny: favoring projects with either a tenant commitment, a unique niche, or in locations with proven resilience. It’s a stark change from the go-go environment a few years ago, but one that indicates a maturing cycle and a focus on long-term fundamentals over short-term exuberance.

Capital Allocation, Investment Trends, and Cap Rates

On the investment side, industrial real estate remains highly coveted, but investors have adapted to the new interest rate regime and market dynamics. The spike in borrowing costs and cooling fundamentals in 2023 caused a valuation reset, but by 2024 the buyer-seller expectation gap began to narrow, resulting in a pickup in transaction activity. As noted, U.S. industrial investment sales volume totaled about $69 billion in 2024, up 14% from 2023 and roughly back to 2019 levels. This resurgence was a strong signal: despite headwinds, capital still prioritizes industrial assets. In early 2025, that trend accelerated – Q1 2025 sales were 25% higher than a year prior, indicating that investors who had been on the sidelines due to uncertainty are re-entering now that pricing has adjusted.

Pricing and cap rates: The most striking change in the investment landscape is cap rate expansion. Industrial yields hit historic lows in 2021; multi-tenant logistics assets frequently traded at 4%–5% cap rates at the peak. Those days are gone. By mid-2025, average cap rates for stabilized institutional-quality industrial assets have moved into the high-5% to ~6% range. The MMCG data shows roughly a 150 basis point increase from the trough – an adjustment consistent with the jump in the risk-free rate and a recognition of slightly higher market vacancy going forward. Cap rates for certain secondary market or single-tenant properties are even higher (mid-6% to 7%+), especially if the lease term is short or the tenant credit is questionable. For example, a Frito-Lay distribution facility in Iowa (with a long 10-year lease) traded in 2025 at a 6.5% cap rate, and another new Frito-Lay warehouse in Washington state traded at 6.0%, reflecting perhaps a bit lower yield for the coastal market. These deals underscore a general trend: investors are demanding higher yields to compensate for increased financing costs and uncertainty, but they will still pay a premium (lower cap rate) for top locations and secure income streams.

That said, the cap rate expansion is not uniform: prime assets in coastal or infill locations with strong rent growth prospects can still trade in the low-5% range – but often those deals have a “story” (e.g., below-market in-place rents that will mark to market, or a recent development with a long lease to a blue-chip tenant). An example cited is an infill multi-tenant warehouse in Maryland that sold at ~5% initial cap, but with only 1.2 years of average lease term left; the buyer underwrote it to a 7% stabilized yield after releasing. This shows how some buyers are blending value-add strategy (accepting a low entry yield with the plan to bump it up soon through lease-up or renewals at higher rents).

Investor profiles and capital flows: The composition of buyers has evolved somewhat. Private capital (high-net-worth individuals, syndicates, local operators) remained very active, especially for deals under $25M, which is the bulk of transaction count. In fact, sub-$10M transactions hit $7.6B in Q1 2025, up ~9%, representing the largest share of volume by count. Meanwhile, institutional investors (pension funds, insurance companies, REITs, private equity funds) have re-emerged for larger deals. Transactions in the $50M+ range saw a huge jump – deals $50M–$100M were up 37% year-over-year, and $100M+ mega-deals more than tripled in volume in early 2025. This barbell activity (many small deals and a surge of very large deals) suggests that institutional capital, which paused in 2022 when interest rates spiked, has regained confidence now that price discovery has largely occurred. Many big investors have dry powder and are eager to increase industrial allocations, given its long-term growth story, but they waited for the right entry point. It appears that late 2024/early 2025 provided that, with pricing roughly 20% off peak and sellers becoming more realistic.

One notable trend is the return of the owner-user buyer. With interest rates up, some companies find it makes sense to own their real estate rather than lease, especially if they are cash-rich. The report highlights that owner/user acquisitions exceeded $1B in both Q4 2024 and Q1 2025, making up ~34% of Q1 industrial volume. A prime example: Burlington Coat Factory (retailer) purchased a 1.3 million SF distribution center in Riverside, CA for $257M (about $289/SF) to secure its logistics capacity for planned store expansion. This is telling – even retail companies recognize the strategic value of locking down warehouse facilities, essentially investing in their own supply chain. Such moves remove inventory from the lease market (tightening supply for tenants) but also reflect confidence from users in the future need for the space.

Capital allocation strategies among investors have become more selective. In 2021, it was hard to go wrong with any industrial asset; now due diligence is key. Investors are focusing on:

• Market selection: There’s an increased bifurcation between those markets viewed as long-term winners vs. those that might have overbuilt permanently. Coastal tier 1 markets (Los Angeles, Northern New Jersey, Bay Area) and high-growth Sunbelt metros (Dallas, Atlanta, South Florida) still top many investors’ lists, but some are cautious on places like Phoenix or Austin in the short term due to high vacancy. Yet, others see the dip in those markets as a buying opportunity, expecting that population and job growth will ultimately fill the space. Overall, capital is flowing in a more disciplined way to markets with either enduring barriers to entry or strong structural growth drivers.

• Asset quality and lease profile: Core investors want modern, high-quality assets (high clear heights, ample dock doors, located near transportation nodes) with stable cash flow. The preference is for properties with longer remaining lease terms to credit tenants, which provide reliable income in uncertain times. Value-add investors, meanwhile, are targeting assets with short leases or some vacancy, banking on releasing at higher rents. Given that rents soared the last few years, many existing leases are below market – a fact that value-add capital is exploiting. The spread between in-place rents and market rents is a cushion for investors: even if market rents don’t grow much near-term, just bringing leases up to today’s market can yield a nice bump.

• Portfolio deals vs single assets: There’s been a pullback in large portfolio transactions (common in 2021) because assembling big portfolios is tricky in a volatile market. Instead, a lot of recent activity is one-off asset trades or small portfolio sales. This piecemeal approach allows investors to underwrite granularly and avoid overpaying for any weaker components. It also aligns with how private buyers (who focus on single assets) have dominated lately.

  
  

Looking ahead, most industry analysts expect industrial investment to remain robust, albeit not at the frothy levels of the peak. There is abundant capital (domestic and global) eager to invest in U.S. industrial real estate, thanks to its solid fundamentals and the e-commerce/logistics story. The main governor will be the debt markets: if interest rates stay high or credit availability tightens, that could constrain leveraged buyers and keep cap rates in the current range or even push them slightly higher. Conversely, any sign of Fed easing or inflation relief could spur another wave of investor interest and possibly cap rate compression. The MMCG report notes that the market is likely to maintain a cautious stance in the near term due to global trade tensions and economic uncertainty, but once this “bout of uncertainty fades, capital should continue to favor industrial assets” given the sector’s strengths.

In summary, developers and investors in 2025 are exercising more discipline than during the go-go pandemic period. Developers are reining in new supply to let demand catch up, and investors are sharpening their pencils to ensure they buy the right assets at the right price. Industrial real estate has transitioned from an exuberant phase to a more normalized, strategy-driven phase. Yet, the underlying appeal of the sector – strong tenant demand drivers, relatively high yield compared to other property types, and historically stable performance – means it remains at the forefront of commercial real estate allocation for many stakeholders.

Top Regional Markets: Winners, Laggards, and Emerging Hubs

The industrial real estate landscape in the U.S. varies widely by region, with 2025 revealing a clear dichotomy between markets that are thriving versus those facing headwinds. Here we highlight notable regional trends and top-performing markets (in terms of demand and investment) as well as those dealing with oversupply or demand softness.

Sunbelt and Texas Metros – High Growth and High Construction: The Sunbelt region continues to dominate in absolute demand growth. Dallas–Fort Worth stands out as the nation’s top industrial market by net absorption, with an astonishing 24 million SF absorbed in the past 12 months – more than any other metro. DFW’s regional economy (diverse in retail, e-commerce, manufacturing, and 3PLs) and central geography make it a logistics juggernaut. Even with that huge take-up, Dallas’s vacancy sits around 9.2% because the metro also led the country in new deliveries. In fact, over 20 million SF is still under construction in Dallas (roughly 2% of its inventory), and developers have eased off new starts to prevent a glut. Houston is another Texas titan: it logged about 13 million SF of absorption in the last year, second only to Dallas, thanks to its port expansion and booming population. Houston’s vacancy is healthier at ~7.0%, partially because its construction pipeline, while large (~10 million SF underway), is more in line with demand growth (Houston’s under-construction to absorption ratio is ~0.8). Austin presents a slightly different story: as a smaller market it had a strong ~4.1 million SF absorption (ranked #6 nationally), but a vacancy of 13.5% – one of the highest in the country – reflecting how a torrent of new supply overshot current demand. Austin’s construction ratio of 2.5 means it has 2.5 times its annual absorption under construction, portending elevated vacancy until new space is absorbed. This pattern of Sunbelt boomtowns seeing high demand but also high vacancy due to construction is echoed in places like Phoenix and Atlanta.

• Phoenix emerged as a top 3 absorption market with 11.8 million SF taken up (third-highest nationally), driven by e-commerce and electric vehicle manufacturing growth. However, its vacancy spiked to 12.6%, among the highest for a big market, due to the massive construction wave (dozens of spec warehouses). Phoenix exemplifies the oversupply risk: certain submarkets have multiple brand-new, 100k–500k SF warehouses sitting empty (as noted, mid-sized logistics vacancy ~20% there). We expect Phoenix will eventually re-balance, but it may take a couple of years of strong absorption to work through the vacant space.

• Atlanta, historically a stalwart logistics hub, is seeing a pause. Despite strong leasing earlier, Atlanta recorded net negative absorption (~–2.2 million SF over 12 months) and vacancy rising to ~8.7%. It’s a bit of a surprise given Atlanta’s sustained economic growth; likely factors include big move-outs or a timing mismatch with lots of deliveries hitting. Atlanta still has significant construction ongoing and remains a strategic Southeast hub, so most observers expect it to bounce back, but in 2025 it has more empty new warehouses than usual.

  
  

Coastal Gateways – Resilient but Not Immune: Coastal port city markets like Los Angeles, Northern New Jersey, the San Francisco Bay, and Seattle were the tightest markets going into 2023, and while they’ve loosened somewhat, they remain relatively constrained compared to interior markets.

• The Los Angeles market (LA County) saw net move-outs of about 6.7 million SF in the past year – a rare contraction likely due to a combination of economic slowdown and some tenants shifting to cheaper Inland Empire space. LA’s vacancy is now ~6.3%, which is double its sub-3% rate a couple years back but still below the national average. Importantly, LA has virtually no land for new development, so supply additions are minimal. This means any uptick in demand (and the ports are expected to recover once trade disputes ease) will quickly tighten the market again. Rents in LA remain the highest in the nation, and investors covet any industrial property there for its long-term scarcity value.

• Inland Empire (Southern California) is a case study in a high-growth region hitting a speed bump. The Inland Empire east of LA was the nation’s hottest market in 2020–21 (vacancy was under 1% at one point). Now, with over 30 million SF delivered recently, vacancy is about 8.4% – a dramatic swing, though still moderate compared to Phoenix/Austin. Net absorption in the IE was barely positive (~0.9M SF) over the past year, indicating a near equilibrium of move-ins and move-outs. However, because IE is so vital for import logistics, most analysts are not alarmed – much of the empty new space is Class A product that is gradually leasing (just at a slower pace). The IE also has some large requirements in the market (e.g. big retailers still consolidating operations there), so it’s expected to bounce back as long as the broader economy stays on track.

• Northern New Jersey/New York market remains tight, with vacancy in the 5–6% range overall. It had very modest absorption recently (only +0.14% of inventory), largely because any new supply gets leased and there’s little churn. But a significant amount of new construction (multi-story warehouses in North Jersey, for instance) is underway, which could nudge vacancy up if demand doesn’t keep pace. Still, given the density of population and barriers to entry, investors are bullish on this region. We did note one weak spot: New York City’s urban industrial (as represented by the “San Francisco” and “San Jose” analogs in the data, likely including Silicon Valley and urban Bay Area) show higher vacancy (13.5% in SF, 8.3% in San Jose). In San Francisco’s case, this might reflect older stock and conversions out of industrial use, as well as tech downsizing impacting some flex/R&D space counted as industrial. But in the core NY/NJ, demand for last-mile facilities (to serve NYC’s 20 million metro population) keeps things healthy.

• Seattle (including Kent Valley) had a slight uptick in vacancy (~8.8%) with flat absorption, but like other coastal markets it is expected to be buoyed by limited land and port-driven demand.

  
  

Midwest and Central Hubs – Steady Performers: The Midwest has a mix of older industrial markets and emerging logistics hubs. Many Midwest metros did not see the same level of speculative building as the Sunbelt, so some are relatively balanced.

• Chicago, the nation’s largest inland port, saw surprisingly low net absorption (~3.2M SF, rank #10) given its size, and a vacancy of ~6.0%. Chicago had a lot of development in its outlying submarkets, which pushed vacancy up a bit, but demand remains fairly steady. Chicago’s central location and huge population ensure it will continue to be a primary distribution hub. Investors still like Chicago for its liquidity and scale, though high property taxes and some outbound migration are watch factors.

• Columbus, Ohio is a standout smaller market – it absorbed ~3.95M SF in the past year (rank #7), reflecting major deals (it’s a big e-commerce and retail distribution location, with Amazon and others having large footprints). Columbus’s vacancy is ~8.4%, above average, but it also has a decent construction pipeline (as a percentage of inventory). Columbus is often cited as a beneficiary of shifting supply chains (for its geographic reach to Eastern U.S. within a one-day truck drive) and continues to attract development (e.g., Intel building massive chip fabs there, which will spin off supplier space needs).

• Kansas City had an excellent year, absorbing ~9.3M SF (rank #4) with vacancy only ~5.5%. KC has quietly become a logistics hub (helped by low costs and a central location at the confluence of major interstates). Its construction ratio of 0.9 indicates a manageable pipeline. Similarly, Indianapolis has been strong historically, though recent data shows Indy’s vacancy creeping up (it’s one of those flagged for high supply risk). St. Louis surprisingly had a very low vacancy of 4.2% and healthy absorption (3.65M SF, rank #8) – the Missouri markets are benefiting from some shift of logistics to more central, cheaper locations.

• Memphis and Louisville (key hubs for FedEx and UPS respectively) experienced some turbulence. Memphis saw a –6.3M SF net absorption (one of the worst, rank #98) and vacancy up to 9.4%. This likely reflects a combination of FedEx’s adjustments and new construction. Louisville isn’t explicitly in the excerpt, but as a proxy, such single-hub dominated towns can swing widely if their main hub contracts or expands.

  
  

Emerging and Niche Markets: A few smaller markets have popped onto investor radar due to specific drivers:

• Savannah, GA – Booming port volumes (Savannah is now one of the busiest U.S. ports) have made it a hotbed for warehouse development. While not in the data excerpt, anecdotal evidence suggests Savannah has added millions of SF and still has relatively low vacancy due to strong tenant interest in port-proximate space.

• Greenville-Spartanburg, SC – An example of a mid-sized market that saw outsized development (as mentioned, it’s at risk of higher availability). It’s a growing manufacturing and logistics node (BMW’s plant, etc.), but the spec building spree has outpaced current demand slightly.

• South Florida (Miami, Fort Lauderdale, Palm Beach) – These markets have done well due to limited land and growing population. Miami’s vacancy is ~6.5%, even after delivering new space, and net absorption was negative (–2.4M SF) likely due to one large move-out. But South Florida’s industrial rents are among the fastest growing, and investors are very keen there, given its status as a gateway to Latin America and constrained geography.

• Secondary Midwest: Cities like Cincinnati (5.8% vac) and Detroit (4.8% vac) have relatively low vacancies, partly because they didn’t overbuild and still have manufacturing bases that take space. Detroit had a big negative absorption (–3.8M SF), possibly due to an auto plant closure or retooling. But generally, these markets are steady if not spectacular.

  
  

In terms of investment, capital is flowing in line with these trends. Markets like Dallas, Atlanta, Southern California, and the Northeast see the majority of large transactions, simply due to their scale and investor familiarity. But increasingly, we see capital chasing growth in places like Phoenix, Charlotte, Nashville, and Denver – albeit carefully given those markets’ pipeline.

One interesting point: the MMCG data provides a “construction ratio” which is a gauge of potential future vacancy pressure. Markets with extremely high construction-to-absorption ratios include smaller ones like Winchester, VA (ratio 13.5), which likely indicates a single large project skewing numbers, and larger ones like Northern New Jersey (9.6) and Inland Empire (7.9) – suggesting those areas have a lot of space underway relative to demand. Dallas’s ratio was only 0.6, signifying its strong absorption relative to construction – a positive sign – while Denver’s was 8.5 due to a stall in absorption. Investors watch these metrics to identify which markets might face rent softness (high ratios) versus which are likely to remain landlord-friendly (low ratios).

In summary, regional performance in 2025 shows a mix of overachievers and underperformers in industrial real estate. The common thread is that markets with significant recent supply additions are dealing with higher vacancy and slower rent growth, regardless of region. Markets that kept supply in check or have unique demand drivers (port, population boom, etc.) are still relatively tight and performing well. We expect some convergence over time – overbuilt markets will lease up and tighten again, while even the tight markets have limited room for further rent spikes given economic conditions. For developers and investors, this means market selection is paramount. Understanding local supply-demand dynamics – vacancy, absorption, construction pipeline, tenant expansions or contractions – is key to making the right bets. The “rising tide” of the last boom lifted most markets, but now more discernment is required to identify the regional opportunities (like a Columbus or Kansas City quietly absorbing nicely) and to avoid near-term pitfalls (like an Austin or Phoenix that might offer better entry in a year or two when vacancy peaks).

Forward-Looking Outlook and Scenarios

As we look beyond mid-2025, the U.S. industrial real estate sector’s trajectory will be shaped by the interplay of macroeconomic forces, the clearing of current supply surpluses, and the enduring structural drivers like e-commerce and supply chain reoptimization. Here we outline the outlook under base-case expectations and consider alternative scenarios, along with key risks and opportunities that stakeholders should monitor.

Base-Case Outlook (Soft Landing): The baseline scenario foresees the U.S. avoiding a pronounced recession, instead experiencing a period of sub-par but positive economic growth (the proverbial “soft landing”). In this environment, industrial demand should continue to grow modestly. Corporate earnings and retail sales would advance slowly, but enough to support ongoing warehouse occupancies – perhaps even a modest re-stocking cycle if businesses grew lean on inventories in 2024. The vacancy rate is expected to crest by late 2025 at just under 8%, then bend downward in 2026. Supporting this inflection will be the drastic pullback in new supply: by 2026, annual deliveries will be far lower than in recent years (as discussed, a potential 10-year low in completions by 2026). When net new supply falls behind net absorption, vacancy will tighten. Rents in the base case are likely to stay relatively flat through the end of 2025, as landlords compete for tenants in what is still a more tenant-favorable market. However, widespread rent declines are not anticipated unless vacancy were to overshoot expectations – more likely, landlords will hold face rents steady but continue offering some concessions to get deals done. By 2026 and beyond, as vacancy recedes into the 6%-range, rent growth could reaccelerate modestly – potentially returning to the 3-4% annual range (the historical average is ~3.3% annual rent growth), which is sustainable long-term. Under this scenario, industrial real estate would effectively stabilize at new equilibrium levels of rent and occupancy: not as tight as the frenzy of 2021, but healthy relative to the pre-pandemic decade.

In the base case, investor sentiment remains constructive. With interest rates eventually plateauing and possibly easing by late 2025, capital flows into industrial should strengthen. We might see a wave of refinancing activity in 2025–26 as loans come due; under a soft-landing scenario, most of those should refinance smoothly (albeit at higher rates than origination). Cap rates might linger around current levels (~6%) in the near term, then potentially compress slightly (into the low-5s to high-5s for core assets) if borrowing costs decline and competition for fewer available properties heats up. Development activity in this scenario would pick up again by 2026, but in a more measured fashion – likely targeting the most undersupplied segments (small logistics facilities, build-to-suits for specific needs, etc.). The base case essentially sees the industrial sector moving past its current indigestion and entering a “mid-cycle” phase of balanced growth.

Downside Scenario (Mild Recession): If macroeconomic conditions take a turn for the worse – for instance, inflation remains sticky prompting further Fed tightening, or consumer spending contracts as excess savings dry up – the industrial market could see a tougher correction. In a mild recession scenario, industrial vacancy could rise into the 8–9% range nationally (vs. ~7.4% now). That implies perhaps another 100–150 bps above the base-case peak. We would likely witness an annual net absorption dip into negative territory (net move-outs) as some companies downsize or close and as new supply hits in 2025 with fewer tenants to backfill. Crucially, rent levels would come under pressure – the MMCG forecast notes this scenario would result in the first material decline in the national average rent since the Great Recession. We might envision a modest rent decline on the order of a few percent nationally, concentrated in the most overbuilt markets and larger big-box facilities. Landlords in those segments would cut rents or give hefty concessions to attract the limited demand. On the capital markets side, a recession could further dampen investment volumes in the short run, and cap rates might blow out another 50–100 bps if debt markets get dislocated or if investors price in higher risk. Construction would almost certainly slow to a crawl, which ironically would set the stage for a quicker recovery once the economy rebounds.

Even under this downside, it’s important to stress that industrial real estate is expected to fare better than most other property sectors. The Great Recession of 2008–09, for example, saw industrial vacancies hit ~10.3% at the worst and rents fall a few percent – painful but mild compared to office or retail. In the next downturn, the presence of e-commerce (which wasn’t nearly as big in 2008) and on-shoring trends could provide a floor under industrial demand. Additionally, any government stimulus or infrastructure spending in a recession could indirectly boost industrial (warehousing for relief supplies, construction materials, etc.). Thus, while a recession would certainly delay the recovery, industrial fundamentals would likely recover faster than, say, office, which faces secular headwinds. The sector’s long-term drivers wouldn’t disappear – they’d just be put on pause.

Upside Scenario (Re-Acceleration): There’s also an upside case where the economy proves more resilient and demand for industrial space surprises to the upside. Consider if inflation is tamed smoothly and interest rates start to ease sooner, boosting confidence. Consumer spending could re-accelerate (particularly if wage growth stays solid), perhaps leading retailers to expand logistics footprints again more aggressively. Another upside factor: supply chain reconfiguration might intensify – for example, if geopolitical tensions or lessons from recent shortages push more companies to onshore manufacturing or hold greater inventories domestically, that could generate incremental industrial demand beyond baseline forecasts. In such a scenario, one could see net absorption exceeding expectations in 2025–26, quickly eating into the vacant stock. Vacancy might peak lower (maybe closer to 7% or below) and drop faster, tightening back toward 5–6% by 2026. Landlords in certain markets might regain pricing power sooner, rekindling rent growth to mid-single-digits annually in hot submarkets that return to low vacancy.

If this upside plays out, we could have a situation where by late 2025, there’s a perception that the worst is over and a renewed shortage looms (given how sharply development has pulled back). This could create a sense of “rolling rally” in the sector: investors rushing in before prices rise again, tenants locking in leases ahead of anticipated rent bumps, and developers cautiously restarting projects to catch the next wave of demand. Arguably, industrial’s secular tailwinds make an upside surprise more plausible here than in sectors like office. The risk, of course, is balancing it with discipline so as not to overbuild at the next upswing.

Key Risks and Wild Cards: Regardless of scenario, a few key wild cards bear emphasis:

• Global Trade Policy: Trade tensions (U.S.–China tariffs, geopolitical conflicts) remain a double-edged sword. Tariffs can dampen trade volumes – as seen with the drop in port imports in 2025 when tariffs rose – hurting warehouse demand near ports. On the other hand, trade disputes can also spur strategic inventory building (to hedge against supply interruptions) or diversification to other import routes (benefiting ports like Houston or Savannah). A resolution of U.S.–China trade disputes could reinvigorate port markets and import-distribution warehousing; conversely, a new trade war or sanctions (e.g. on other nations) could jolt certain supply chains.

• Energy Prices and Manufacturing: A spike in energy costs or raw materials could influence manufacturing location decisions, potentially increasing domestic production of energy-related goods (boosting certain industrial uses, e.g. petrochemical storage in Houston) but also raising operating costs for tenants (squeezing margins and ability to pay rent).

• Labor and Automation: Industrial real estate is indirectly affected by labor dynamics. Warehouse labor shortages have been an issue; if labor remains tight, occupiers might constrain expansions or invest more in automation/robotics (which could change the type of facilities needed – e.g. more high-clear-height mega centers). Automation could allow higher throughput in less space, slightly tempering space demand per dollar of sales over time. However, history shows automation usually complements rather than reduces overall space needs due to volume growth.

• Infrastructure and Policy: Government infrastructure investment (roads, ports, rail) can open new submarkets. For example, if the U.S. invests in inland ports or new rail corridors, we may see unexpected new logistics hubs emerge, shifting regional demand patterns. Also, incentives like the 2022 CHIPS Act (for semiconductor plants) or green energy subsidies (for EV/battery factories) are directly resulting in large specialized industrial projects in states like Ohio, Arizona, and Nevada. These can create clusters of supplier warehouses and logistics around them.

• Climate and Environmental Risks: Industrial assets are not immune to climate impacts. Hurricanes, floods, and wildfires can disrupt distribution networks regionally, as seen when Gulf Coast hurricanes shut down petrochemical hubs or when floods impact river transport. Over time, some investors may start factoring climate resiliency into valuations (e.g. favoring assets away from coasts or in buildings resilient to heat for cold storage). This is more of a long-term consideration but worth noting.

  
  

In concluding this 2025 outlook, the industrial real estate sector is transitioning to a new phase. After the exhilarating sprint of the past few years, it is catching its breath. Stakeholders – developers, investors, and occupiers – are recalibrating strategies for what lies ahead. For developers, the mantra is “proceed with caution”: focus on projects that meet demonstrated demand, in locations and segments where supply is genuinely needed, and avoid adding to the pile in overbuilt markets. For investors, it’s about discernment: the sector’s tailwinds make it attractive, but smart capital will target the right assets (future-proof, well-leased or with clear upside, in markets set to recover strongly) and underwrite with realistic assumptions (moderate rent growth, adequate cap rate buffers). For tenants/occupiers, there is a window of opportunity in 2025 to secure space with more favorable terms than a couple of years ago – tenants can lock in quality facilities, perhaps upgrade to newer space, or negotiate better rents and concessions given higher vacancy. This window won’t last indefinitely if the forecasted recovery takes hold by 2026.

In essence, the outlook for U.S. industrial real estate remains robust in the long run, anchored by the e-commerce revolution and the imperative for modern supply chains. The current challenges – higher vacancies, slower growth, and economic uncertainty – are real, but largely cyclical and self-correcting (through reduced construction and the ongoing consumption of available space). Barring a major economic shock, the sector is expected to work through these challenges over the next 12-24 months. By 2027 and beyond, we anticipate industrial real estate will once again be in growth mode, albeit hopefully a more sustainable one, continuing to deliver value for both investors and the businesses that rely on these critical facilities to keep commerce moving. As always, those developers and investors who best understand the shifting currents (from macro trends to micro-market nuances) will be best positioned to capitalize on the next chapter of industrial’s evolution. The race is not over – it’s just entering a new lap, with a few hurdles to clear before the next sprint.

Sources:

• Wall Street Journal – “Warehouse Market Cools After Pandemic Boom” (May 2025)Highlights rising vacancies and slower rent growth in the U.S. industrial market.

• Bloomberg – “E-Commerce Drives Logistics Investment Despite Economic Headwinds” (April 2025)Details how online retail is still pushing warehouse demand, especially last-mile.

• CBRE – “U.S. Industrial Real Estate Outlook 2025” (March 2025)Offers forecasts for rent, construction, and cap rates; confirms market softening trends.

• Prologis Research – “Supply Chain Trends 2025: Resilience and Rebalancing” (February 2025)Explores how companies are reshaping networks post-COVID and amid trade friction.

• NAIOP – “Industrial Demand Forecast” (Q1 2025)Projects near-term U.S. absorption; useful for contextualizing MMCG vacancy data.

• Oxford Economics – “U.S. Macro Outlook: Consumer Spending and Trade Risks” (January 2025)Provides macro context on inflation, retail sales, and tariffs affecting industrial demand.