Current State of the U.S. Industrial Real Estate Market – Q3 2025

3 Star Industrial Warehouse

Executive Summary: 

The U.S. industrial real estate sector in Q3 2025 is navigating a deliberate downshift from its pandemic-era boom. Market fundamentals remain relatively healthy but have softened: national vacancy sits around 7.5%, a decade-high but only slightly above long-term norms, while rent growth has decelerated to roughly +1.4% year-over-year (YoY) – its slowest pace since 2012. After record expansion, supply additions are finally outrunning demand, pushing vacancies upward and halting landlords’ pricing power. Net absorption turned negative in Q2 2025 for the first time since 2010, though Q3 saw a return to modest positive absorption (~13.3 million SF). At the same time, capital market conditions have recalibrated: investment volumes are subdued but stabilizing, and cap rates have expanded by roughly 150 basis points from their 2021 lows, now hovering near the 6% range. A higher interest rate environment and tighter credit availability have repriced risk across the sector. Significant regional and segment disparities are emerging – smaller “last-mile” facilities in high-growth markets remain tight, even as big-box distribution centers in certain Sunbelt hubs grapple with oversupply. This report delves into these dynamics, interpreting what the latest data from the MMCG database and public sources indicate for market health, leasing and construction trends, absorption, capital flows, risk pricing, and regional performance, all against the backdrop of a shifting macroeconomic and policy landscape. Finally, we conclude with implications for underwriting and capital allocation strategies for lenders and investors.

Market Health Overview: Cooling Off from Historic Highs

By late 2025 the industrial sector’s fundamentals have clearly downshifted from the frenetic growth of 2021–2022 into a more balanced (if slightly softening) state. Vacancies have risen for nearly three years, reaching ~7.5% as of Q3 2025. This marks a sharp increase from the sub-4% vacancy trough in mid-2022, but notably it brings vacancy back in line with the long-run average (~7.4%) for the industrial market. In other words, after an extraordinary run of demand far outstripping supply, the market is reverting toward equilibrium. Landlords have lost some leverage: conditions now favor tenants more than at any time in the past decade, as evidenced by flat-to-declining rents on a quarterly basis and greater concessions being offered on large leases. National asking rents, which soared by 9–10% annually at the peak in 2022, have essentially plateaued, posting only about +1.4% YoY growth as of Q3–Q4 2025. In fact, rent growth has slowed to a crawl and turned slightly negative quarter-on-quarter (approximately –0.1% in Q3), indicating that average industrial rents are no longer rising in nominal terms.

This cooling in rents and rise in vacancy reflect a meaningful shift in supply-demand balance. Over the 12 months through Q3 2025, the MMCG data shows roughly 266 million square feet of new industrial space delivered, while only about 72 million SF was absorbed (net) in the same period. This 4:1 ratio of new supply to net demand is a stark contrast to the prior few years – for perspective, current annual absorption is running at only ~40% of the pre-2023 historical average. In Q2 2025, net absorption even dipped into negative territory (the first quarterly contraction in over a decade), as move-outs outpaced move-ins. Although Q3 saw a return to positive absorption (~13.3 million SF net, slightly exceeding new completions), it was not enough to materially alter the rising vacancy trend. Vacancy today is about 80 basis points higher than a year ago, when it stood in the mid-6% range, and up almost 400 bps from the 3.8% low in 2022. Importantly, however, vacancy remains well below the last cycle’s peak (which was above 10% in 2010). Thus, while the industrial market’s health has moderated from “red-hot” to something more normal, it is not in distress – instead it appears to be undergoing a controlled cooling.

From a lender/investor perspective, key headline metrics illustrate this transition: rent growth of ~1–2% YoY versus ~7–10% at the peak; vacancy in the mid-7s (%) versus sub-5% lows; and cap rates near 6% instead of sub-5%. Each of these shifts points to a market finding its post-boom footing. Yet, within those aggregate figures lies significant nuance – certain segments and regions remain exceedingly tight and resilient, while others face burgeoning headwinds. The sections below explore these dynamics in detail, from leasing and absorption trends to construction, capital markets, and geographic disparities.

Demand & Leasing Dynamics: Tenants Gain Breathing Room

Leasing activity in 2025 has been a story of deceleration with pockets of strength. Total new leasing volumes (excluding renewals) actually jumped in early 2025 compared to recent norms – a curious spike driven in part by tenants rushing to secure space ahead of anticipated tariff escalations. Markets in the Midwest and South saw especially robust leasing in H1 2025: cities like St. Louis, Richmond, Columbus, Nashville, Greenville, Memphis, Charlotte, and Greensboro all recorded new lease volumes more than 50% above their prior two-year averages. Even traditionally tight coastal hubs such as San Francisco and the Inland Empire (Southern California) showed improved leasing momentum mid-year. This burst of tenant activity indicates that underlying demand drivers – e.g. 3PLs, retailers, manufacturers, and e-commerce distributors – remain active. Industrial occupiers are still expanding, particularly in regions with population and logistics advantages.

However, this uptick in gross leasing has been outpaced by the surge in new availabilities hitting the market. Space is coming online (or being vacated) faster than it can be backfilled. The MMCG database reports that the volume of space listed as available has been rising, pushing the overall availability rate (including vacant new deliveries) to about 9.7% as of Q4 2025. This indicates many freshly completed buildings (and some second-generation spaces) are languishing on the market for longer. In fact, the median time on market for newly leased space in 2025 has nearly doubled to ~5 months, versus a brisk ~3.5 months just a few years ago. Tenants now have more choices and can negotiate more patiently. Accordingly, landlords have had to become more aggressive in courting tenants, often through concessions (discussed more in the rent section below).

Net absorption, a key gauge of demand, has weakened significantly. After averaging well above 150–200 million SF annually during 2018–2022, net absorption over the last 12 months plunged to roughly 72 million SF. In Q2 2025, absorption was actually negative (~–20.5 million SF), marking the first quarter in 13+ years where move-outs exceeded move-ins nationally. Several factors explain this slowdown. Consumer goods inventories normalized after the pandemic restocking craze, reducing the immediate need for additional warehouse space. Some large occupiers like Amazon had previously overshot their space requirements and sublet or gave back facilities in 2023–24, which still weighs on absorption. Economic uncertainty and higher costs of capital have made some businesses hesitant to expand logistics footprints. Additionally, trade and tariff issues have introduced volatility – for instance, imports at major U.S. seaports have been choppy, and retailers are more cautious about inventory growth amid tariff-related cost increases. All of this has tempered the once-insatiable demand for industrial space.

That said, demand has not disappeared by any means; it is simply less torrid and more selective. Third quarter 2025 provided a hopeful sign as net absorption turned positive again (about +13.3 MSF net), suggesting that tenants are continuing to absorb new space, just at a more modest pace. Many tenants remain active in the market – particularly those in growing sectors like automotive supply (EV battery production, etc.), defense contractors, building materials, and, importantly, small businesses that drive “last-mile” and local industrial demand. Indeed, one of the strongest segments of demand is for smaller industrial units (under 50,000 SF), which are being snapped up relatively quickly to support population-driven local services. The MMCG data shows spaces under 50k SF leased in the first half of 2025 spent a median of just ~4.6 months on the market, far faster than large logistics facilities over 100k SF which often sat 12–18 months before finding tenants. This reflects the bifurcation in demand: “small-bay” industrial is still highly sought-after and occupancy remains very tight (<5% vacancy) in that segment, whereas demand for cavernous big-box warehouses has softened considerably.

Supply & Construction Trends: From Supply Wave to Slow Drip

On the supply side, the industrial development machine that roared through the early 2020s is finally tapping the brakes. New construction deliveries peaked around late 2023 – at the height, nearly 150 million SF of new industrial space (roughly 0.8% of existing inventory) delivered in just Q4 2023, an unprecedented flood of new warehouses. Since then, quarterly completions have trended down sharply: by Q2 2025, only about 64 million SF (0.3% of inventory) delivered in the quarter, and the run-rate is expected to keep falling into 2026. The pullback in groundbreakings over the past two years is now visibly curtailing completions. Developers, facing a more difficult financing and leasing environment, have scaled back speculative projects. U.S. industrial construction starts actually hit a 10-year low in late 2024 and early 2025. This is a remarkable turn from 2022, when starts were at record highs. On average, large industrial projects take ~14 months to build, so the slump in starts is setting the stage for a steep decline in deliveries by early 2026 as the last of the prior pipeline works its way through.

Several forces have conspired to slow new development. One major factor is capitalization rates and the cost of capital: developers anticipate higher exit cap rates on new projects (around 6% now, vs. 4.5% a couple years ago), which thin out development profit margins and make fewer projects pencil. At the same time, construction financing has become more expensive and harder to obtain – banks have tightened lending standards for construction loans, and interest rates on development debt have jumped dramatically. In Q2 2025, a Federal Reserve survey found that moderate net shares of banks tightened credit standards on commercial real estate and construction loans, while demand for such loans also weakened. This credit tightening, combined with higher benchmark rates (the Fed’s policy rate in 2025 sits at its highest level in over 15 years) and elevated bond yields, has raised the hurdle for new projects. Finally, construction costs remain near all-time highs, with materials and labor shortages (partly exacerbated by tariffs and immigration restrictions) eating into pro-forma returns. In short, developers have grown cautious – and the era of “if you build it, they will come” speculative warehouse construction has paused for now.

Despite this slowdown, a significant amount of supply is still in the pipeline. About 318 million SF of industrial space is under construction nationwide as of Q3 2025. Much of this was started during the 2021–2023 boom and will deliver over the next few quarters. Some markets are midstream in a record supply wave that tenants will take time to digest. For example, several Sunbelt and Midwest markets with fewer development constraints are facing a glut of new logistics buildings. Austin, Indianapolis, Greenville/Spartanburg, Phoenix, and San Antonio stand out as markets with an oversupply risk – each saw massive speculative building in recent years that could take two+ years to absorb at normal demand levels. Phoenix is a cautionary tale: since 2019, vacant space in Phoenix’s existing 100–500k SF logistics properties swelled by 19 million SF, driving vacancy for that segment above 20%. And another 8.2 million SF of similar space is still under construction in Phoenix, meaning even if no new projects start, it could take nearly 3 years for Phoenix’s mid-sized warehouse vacancy to fall back to normal (~10%). Other high-growth markets are in similar straits – a wave of 2022–24 speculative projects (often mid-sized boxes) is now competing for tenants, often even against larger 500k+ SF “mega-boxes” that can be subdivided to attract mid-size tenants. This is clearly a tenant’s market in the oversupplied locales.

By contrast, supply remains much more constrained in infill coastal markets and in the small-unit segment. Very little new “small bay” industrial product (buildings <50k SF) has been built in most cities – developers focused on scale, not these niche projects – so vacancy for small units is chronically low (often under 5%). Some of the most acute shortages of small industrial space are reported in rapidly growing metros like Nashville, Jacksonville, Orlando, Tampa, and Charlotte, where demand from construction trades and local services is high but new supply of small units is scarce. Even many coastal port markets, despite slower cargo volumes recently, have limited new land for development, which helps cap vacancy. Thus regional disparities in supply are widening: markets with abundant cheap land (many in the South/Southwest) saw huge construction booms and now higher vacancies, while land-constrained or under-built markets (coastal and high-population areas) generally remain tighter.

Looking forward, the construction slowdown may be a blessing in disguise for market balance. Industrial developers are effectively self-regulating by pulling back – this should prevent a more severe glut. Forecasts suggest U.S. industrial deliveries will keep falling and could hit a decade-low by 2026 given the trough in starts. If demand holds up even modestly, vacancy should peak around the high-7% to 8% range in 2026 and then start to improve as the pipeline clears. Indeed, MMCG’s outlook calls for vacancy to crest at roughly 8% by early 2026 and then trend down in 2027 as construction moderates. For lenders and investors, this means the worst of the supply indigestion may pass within 18–24 months, assuming no major shock to demand. However, any unexpected drop in demand (e.g. a recession) could worsen the supply overhang in the near term, so construction risk and lease-up risk remain key underwriting considerations.

Rent and Vacancy Performance: Landlord Market No More

The cooling fundamentals have translated directly into flattening rents and higher vacancy rates, a stark change from the landlord-favorable conditions of recent years. Average asking rents for U.S. industrial space are essentially static as of Q3 2025, after years of steep climbs. As noted, YoY rent growth is ~1.4% nationally, but that figure is buoyed by rent gains that occurred in late 2024. In real time, rents are no longer rising – the most recent quarter saw a slight decline in the national average rent (–0.1%). Effectively, landlords have lost pricing power due to the one-two punch of elevated vacancy and slower leasing velocity. This is the first time since the early 2010s that rent growth has been this low, and it follows an exceptional period where rents jumped 20–30% cumulatively in 2021–2023.

The rent moderation is not uniform across segments. There is a clear dichotomy between larger, newly built logistics facilities and smaller industrial units:

• Big-Box Distribution Centers (100k–500k+ SF): This segment has seen effective rents decline in many markets. With vacancy rates for big-box logistics warehouses now often in the high single-digits to low teens (and above 10% in some markets), landlords of large facilities have had to become very competitive on rents and terms. Asking rents for large logistics spaces peaked in 2023 and have since softened by a few percent in most major hubs. Several markets that experienced frenzied rent growth for big boxes (50%+ rent surges during 2021–22) are now seeing nominal rents give back some ground as vacancies mount. Landlords are also deploying concessions to fill big blocks – a major shift from 2021 when tenants would accept space “as-is.” According to the MMCG data, one top industrial REIT reported free rent concessions equal to ~2.8% of lease value over the past year, up from 1.8% the year prior. It’s becoming common to see 3+ months of free rent on a 5–7 year large lease now, whereas virtually no free rent was offered at the height of the boom. In one striking example, a tenant (a sauna equipment company) negotiated 6 months free on a 5.5-year lease for a new 177,000 SF warehouse in the Inland Empire in early 2025. These kinds of concessions underscore the tenant-favorable conditions in the oversupplied big-box segment. Landlords of newer bulk warehouses in markets like Austin, Indianapolis, Phoenix, Greenville, and San Antonio are most at risk, as those markets are saturated with speculative projects and tenants know they have options. We are likely to see rent stagnation (or even further decline) for large logistics facilities into 2026 in such areas, until vacancy rates retreat to healthier levels.

• Small-Bay and Light Industrial (<50k SF spaces): In sharp contrast, rents for smaller industrial units continue to notch new all-time highs in many markets. Tight vacancies (often in the 3–5% range) and limited new supply have allowed landlords in this segment to maintain steady rent growth. For instance, asking rents for sub-10,000 SF spaces surpassed $13.50 per SF (NNN) nationally in mid-2025 – an all-time high – and 10–25k SF spaces also hit record highs at over $11.80 NNN. These smaller spaces benefit from diversified demand (local businesses, last-mile distribution, service/trade companies, etc.) and virtually no new construction targeting them. As a result, landlords have been able to push rents for small units even as the broader market slows. Rent growth for the smallest segment remains positive and outperforms larger segments. In fact, many tenants in older small-bay properties are now facing significant mark-to-market increases upon renewal, since market rents today are still much higher than the expiring rents locked in 5+ years ago. One caveat is that even in this tight segment, there are limits to rent hikes – many small business tenants are highly sensitive to costs, and after the enormous rent run-up of 2021–2023, there is resistance to further sharp increases. Landlords in small-bay assets are finding that the easy rent bumps are behind them too, and any further growth will be modest given economic conditions.

Overall, the national industrial vacancy rate sits at ~7.5% for existing buildings and about 9.7% including available space in buildings under construction. This is a notable increase from roughly 6.7% a year prior and the historic low of ~3.8% in 2022. The vacancy expansion has been most pronounced in the “logistics” subtype (warehouses and distribution centers) – vacancy for logistics properties is now ~8.4% nationally, up 460 bps since mid-2022 in that subtype alone. On the other hand, vacancies in manufacturing-oriented industrial properties and flex buildings have risen much more gently (only ~110–210 bps off historic lows). Specialized industrial (manufacturing facilities) still have a very low vacancy around 4.3%, reflecting stable demand and fewer speculative builds in that category. Flex space (single-story R&D, showroom, or tech space) carries ~8.1% vacancy, up slightly, but flex often caters to unique local needs and hasn’t seen oversupply. This divergence implies core manufacturing and flex assets remain relatively tight, whereas warehouse/distribution is where most slack has emerged.

Rent and vacancy outlook: As long as vacancy stays elevated, rent growth will likely remain subdued. Landlords face the double challenge of tenuous economic conditions and tenant pushback after the outsized rent hikes of recent years. The consensus is that 2025 will be the second consecutive year of below-trend rent growth – effectively a pause after the pandemic-era surge. Some markets or segments may even register minor rent declines for the first time since the Great Recession if conditions don’t improve. Notably, analysts suggest that if the economy slips into a mild recession, it could push industrial vacancy into the 8–9% range and likely cause the first meaningful national rent decline in over a decade. Thus, rent forecasts are cautious. The silver lining is that new supply is set to shrink; with far fewer projects breaking ground now, the pipeline after 2025 will be limited, which could restore some landlord leverage by 2027 if demand even modestly returns. But for the coming 12–18 months, landlords must compete on price and terms, and underwriting should assume very conservative rent growth (if any) and adequate downtime & concessions for new leases.

Capital Markets & Risk Pricing: Repricing in a Higher-Rate World

The industrial sector’s capital markets have been adjusting to the new interest rate regime and economic uncertainty. Transaction activity in 2025 has downshifted significantly from the record highs of 2021–22, but appears to be stabilizing at a lower plateau. According to MMCG data, Q3 2025 investment sales volume was roughly on par with Q2 and also with the same quarter last year, indicating that the market may have found a footing after the sharp pullback in 2023–early 2024. Buyers and sellers are gradually narrowing the bid-ask gap, albeit at pricing that reflects higher yield requirements. Year-to-date 2025 sales total about $47.6 billion nationally (through mid Q3), down from the frenzied pace of 2021–22 but not collapsing further. Investors are digesting the implications of slower fundamentals – for instance, the shock of Q2’s negative absorption gave some pause – yet industrial real estate remains a favored asset class relative to other property types (like office or retail). There’s a sense that the capital is still out there for industrial deals, but it has become much more selective and expensive.

Asset pricing has undergone a noticeable correction. As interest rates spiked, industrial cap rates expanded by roughly 150 bps from their trough in 2021. Back in 2021, top-tier, stabilized warehouse assets were trading at yields in the mid-4% range (or even lower for the absolute best coastal assets). By late 2025, typical cap rates for stabilized institutional-quality industrial assets are hovering around ~6%. This repricing corresponds with the jump in borrowing costs and the end of the ultra-low-rate era. Notably, the rise in cap rates was front-loaded – much of the increase occurred during 2022–2023. Compared to a year ago, cap rates are up only modestly (perhaps 50–75 bps), as the market largely adjusted in the prior year. Still, that means values for equivalent assets are down on the order of ~10–15% year-over-year (and ~20–30% from 2021 peak values, depending on the asset’s income growth). Industrial pricing is now fundamentally being underwritten on a higher yield basis to ensure acceptable spreads over debt costs and risk-free rates.

We see evidence of this new pricing paradigm in recent deals. For example, in August 2025 an investor acquired a fully leased three-building warehouse portfolio in Minneapolis for $57 million at a 6.25% cap rate – a level that would have seemed like a bargain two years ago. Likewise in July, a core multi-tenant logistics facility in the Seattle region (Frederickson, WA) traded at a 5.2% cap rate – notably low, but this deal “had a story” (brand-new construction, fully leased to strong tenants, in a supply-constrained submarket). Such sub-5.5% cap deals have become outliers that require exceptional asset quality or growth narrative; they are “printing” only when an investor has high conviction on rent upside or strategic fit. More commonly, even very solid assets in major markets are trading around 5.5–6% caps, and secondary market assets or those with vacancy/lease-up risk are transacting higher. Single-tenant, long-term leased industrial (essentially net-leased assets with bond-like income) can still command somewhat lower caps (in the low-5% range) due to the “durable income” appeal. But multi-tenant and/or shorter lease term product is generally in that ~6% context now.

Buyer pools and capital sources have shifted as well. In the smaller deal arena (sub-$10M transactions), private local buyers and 1031 exchange investors remain very active, keeping that segment liquid. However, in the mid-market range ($10M–$50M), activity has been more muted – many regional syndicators and non-traded REITs that were active have pulled back, and debt for mid-sized deals is pricier. The interesting development is at the high end: institutional capital (pension funds, PE funds, REITs) has started to re-engage for $50M+ industrial acquisitions. During 2H 2024, many big institutions were on the sidelines, but by mid-2025, they cautiously returned, seeing buying opportunities at adjusted pricing. In Q3 2025, institutional buyers made up ~45% of acquisitions in the $50M+ segment (with private capital and REITs comprising most of the rest). Joint ventures and equity capital raises targeting industrial are also ongoing, as long-term investors remain bullish on the sector’s fundamentals (once the current uncertainty lifts). We even see some owner-user purchases picking up – e.g., Burlington Coat Factory’s $257M purchase of a 2019-built distribution center in California – which speaks to the confidence end-users have in the strategic necessity of these assets for their operations.

Debt markets and risk pricing: The cost of debt has become a critical factor in industrial deals. With the Federal Reserve holding benchmark rates at elevated levels through 2025, commercial mortgage rates for industrial properties are in the 6–7%+ range, up from ~3–4% two years prior. This has changed the math on leveraged returns. Many buyers are using lower leverage (often sub-60% LTV) to make deals pencil, and some purely core deals are being bought all-cash by institutions waiting for a better debt environment. Lenders, for their part, are cautious. As noted, banks have tightened CRE lending standards and are charging higher spreads for risk – per the Fed’s Senior Loan Officer survey, about 10–20% of banks tightened standards on non-residential CRE loans in Q2 2025, and a similar share did so on construction/development loans. They also reported weaker demand from borrowers for those loans, reflecting fewer new projects and refinances. Life insurance lenders and debt funds are selectively active but also pricing conservatively. Credit spreads for industrial loans have widened somewhat given macro uncertainty – lenders want more cushion given the possibility of softer rents or value declines. All this means higher “all-in” capitalization rates (cap rate + debt constant) for investors, and thus higher required going-in yields.

In terms of risk pricing, investors are now demanding a reasonable spread above the risk-free rate to compensate for real estate risk. The U.S. 10-year Treasury yield, hovering in the 4.5–5.0% range by late 2025, sets a much higher floor than near-zero rates did. A 6.0% cap rate on prime industrial implies only ~150 bps spread over the 10-year – relatively tight by historical norms. This suggests that industrial assets are still priced richly relative to bonds, a testament to investor confidence in long-term rent growth and low capex, but it also means there’s limited room for error. If long-term rates push higher, cap rates could face further upward pressure. For riskier industrial assets (e.g. those with vacancy, shorter leases, or secondary locations), cap rates and required yields have moved up even more to, say, 7–8%+, as investors price in leasing risk and offer much lower proceeds. The market is differentiating more by asset quality and location now: the spread between Class A core assets and Class B/C assets has widened. For instance, a shallow-bay older warehouse in a tertiary market might only attract buyers at an 8%+ cap today, whereas a port-adjacent modern facility might still clear at 5.5% if it has a strong tenant lineup. This repricing and stratification of risk is healthy, and it rewards disciplined underwriting.

In summary, capital markets for industrial real estate have reset to a higher cost of capital environment. The sector hasn’t lost its luster – in fact, industrial is still viewed as one of the more resilient property types – but investors have adjusted return expectations upward. Deals are getting done at pricing that reflects both higher interest rates and the current weaker fundamentals, and both equity and debt providers are carefully underwriting the risks (lease-up, future rent growth, exit cap, etc.). For lenders and investors now, it’s about striking a balance between caution and strategic opportunity: the slowdown in price growth has opened a window to acquire quality industrial assets at a relative discount to recent years, but one must underwrite conservatively in case the market softens further in the short term.

Regional & Segment Disparities: A Two-Speed Industrial Market

As alluded to throughout, the “industrial market” is not monolithic – performance varies widely across different regions and sub-sectors. Regional disparities have become more pronounced in 2025, largely based on how much each market built during the boom and what drives local demand:

• Sunbelt and Inland Logistics Hubs (High Supply Growth Markets): Many fast-growing Sunbelt markets (Texas, Southwest, Southeast) and interior distribution hubs enjoyed a development boom and are now seeing higher vacancies. We’ve mentioned Austin, Phoenix, Indianapolis, San Antonio, which each have large swaths of new warehouses to fill. In these markets, vacancy rates have climbed well above the national average, particularly for larger facilities. Tenants have abundant choices, and rent growth has stalled. For example, in Austin, one of the nation’s darlings during the e-commerce surge, a wave of speculative 100–500k SF projects delivered recently, leading to a decidedly tenant-friendly market with soft rents. Phoenix – a big inland port – has parts of its logistics market at ~20% vacancy as noted. Atlanta, Dallas-Fort Worth, Houston, and Chicago are also dealing with large pipelines, though their strong underlying demand (and, in some cases, build-to-suit activity) has kept fundamentals more balanced than in smaller markets. Rent growth in many of these high-supply Sunbelt markets has flipped from double-digit gains to flat or even slightly negative YoY, especially for bulk warehouses. Land values and speculative development margins in these areas have come under pressure. For investors, these markets may offer higher yields (caps are generally higher here now to reflect the softer fundamentals), but one must underwrite longer lease-up periods and be selective on location (proximity to population centers or infrastructure is key, as fringe speculative locations may struggle the most).

• Coastal Gateway and High-Barrier Markets: Coastal port cities and land-constrained metros (e.g. Southern California – Inland Empire & LA/OC, Northern New Jersey/New York, Bay Area, Seattle, South Florida, Boston) entered this softening cycle with extremely low vacancy and limited new construction opportunities. They have not been hit as hard by oversupply, though they are not immune to demand slowdown. For instance, the Los Angeles market’s vacancy has inched up but is still relatively low for warehouse space (mid-single digits in many infill submarkets). Rents in coastal gateways have flattened after astronomical rises, but owners aren’t yet slashing rates – many tenants in these markets simply have few alternatives given geography. One caution for coastal port markets is the impact of trade volatility and tariffs: West Coast ports like LA/Long Beach have seen cargo volumes underperform as some supply chains diversified or slowed. Tariffs and trade policy uncertainty pose a specific demand risk in port-dependent markets; warehouse absorption in these areas could lag if imports contract. Indeed, MMCG notes that tariffs are a downside risk for logistics demand on the coasts, with some retailers hesitating on expansion until trade clarity improves. Still, from a vacancy standpoint, high-barrier markets remain comparatively tight – many coastal submarkets have vacancy half the national average for industrial. Rent levels in these markets are also structurally higher (e.g. $15–20+ per SF in SoCal or NJ, vs $5–8 in parts of the Midwest), and those high rents have mostly held, albeit with greater concessions now. Cap rates in gateway markets have risen but often remain lowest in the nation (investors pay a premium for the long-term scarcity value). For lenders, these markets may present lower leasing risk but also lower going-in yields.

• Midwest Manufacturing Corridors: An interesting dynamic is playing out in the Great Lakes and Midwest regions, traditionally manufacturing-centric. States like Michigan, Ohio, Indiana – where heavy industry and automotive supply chains are big drivers – have attracted significant new investment due to on-shoring trends and federal incentives (like the CHIPS Act for semiconductors and EV battery plant initiatives). IBISWorld notes that the Great Lakes region has been a manufacturing powerhouse, buoyed by major investments and government support programs in semiconductors and related industries. As a result, industrial construction activity in some Midwest areas has been strong (Michigan leads in that region for industrial project spending), but these tend to be specialized facilities (factories, plants) often built for owner-users or specific tenants. The multi-tenant warehouse stock in many Midwest cities (Columbus, Indianapolis, Cincinnati, Louisville, etc.) did expand a lot, and some of those markets now face higher vacancy in speculative warehouses. Meanwhile, demand for manufacturing space or build-to-suit facilities remains solid thanks to re-shoring. For example, Columbus and Indianapolis benefited from big e-commerce and retail distribution centers (driving up supply and now vacancy), but Detroit or Toledo are seeing investment in manufacturing plants (less impacting multi-tenant vacancy). In summary, the Midwest is a mixed bag: distribution hubs there generally see the same oversupply issues as the Sunbelt, but areas with a manufacturing renaissance (due to federal incentives like IIJA and CHIPS) might have stronger industrial contractor activity and future demand for specialized facilities.

• Secondary & Tertiary Markets: Some smaller metropolitan areas rode the industrial wave and are now feeling hangovers. For instance, Greenville-Spartanburg (SC), Reno (NV), Savannah (GA), Lehigh Valley (PA) – these medium-size markets became hot logistic nodes (often for regional distribution or port overflow) and built a lot per capita. Many are now seeing vacancy climb as new supply hits. On the other hand, tertiary markets that did not see as much speculative building (often due to less developer interest or weaker demographics) remain relatively stable. It’s very market-specific: those with growth narratives and lots of construction have more pain now; quieter markets have less volatility but also less liquidity.

• By Property Subtype: We should also note disparities by subtype across regions. Logistics/warehouse (particularly big-box) is the weakest subsector at the moment, universally facing higher vacancy. Manufacturing/specialized industrial (often single-tenant facilities for production) is holding up well – vacancies are low (4–5% range) – partly because these are often build-to-suit and not oversupplied. Flex industrial (a small portion of the market) has mid-level vacancy (~8%); demand for flex (think small business spaces, tech/R&D uses) depends more on local economic factors and has been steady in some tech-oriented markets but soft in others. If the tech sector or small business formation picks up or slows, flex demand will follow suit.

In sum, the industrial market’s cooling is far from uniform. Regions like the Southeast and Southwest have more of a supply indigestion issue, whereas coastal and infill regions face more of a demand-side pause but little oversupply. This creates opportunities and risks: Investors might find better pricing and higher yields in markets like Phoenix or Indianapolis now, but must accept higher vacancy risk and a longer absorption timeline. Conversely, investing in a supply-constrained coastal market might offer more stability but at lower cap rates (and one must be comfortable with the regulatory and land constraints that limit growth there). Lenders similarly may calibrate loan terms by market – requiring, say, more conservative underwriting in oversupplied regions vs. being slightly more aggressive (though still prudent) in high-barrier areas.

Macroeconomic & Policy Context: Headwinds and Tailwinds

The broader economic and policy environment in 2025 is an important backdrop for the industrial real estate outlook. Macroeconomic growth has been choppy but generally better than feared. After a weak start to the year (Q1 2025 GDP contracted slightly – a 0.5% annualized dip due to an import surge), the economy picked up in Q2 with a robust +3.8% GDP growth (revised upward on strong consumer spending and business investment). Early estimates suggest the third quarter continued to show solid consumer outlays and business outlays (notably in AI-related equipment). Consumer spending has been a relative bright spot, growing ~2.5–2.7% in real terms through mid-2025. This resilience helps industrial demand (warehousing is ultimately driven by consumption of goods). However, warning signs are flashing: consumer and business sentiment have weakened amid policy uncertainties and rising costs. Real household incomes have been pressured by inflation and now by tariff-related price increases. Retailers are cautious that significant new tariffs on imports act like an “inflationary shock” to consumers, potentially curtailing spending volume and thus warehouse needs. There is also an ongoing debate about whether the economy will slip into a mild recession in the next year – something that would clearly dampen industrial space absorption further. Forecasters put the probability of a recession in late 2025/early 2026 at a meaningful level (some estimates ranged around 20–30% earlier in the year and have likely risen since).

Interest rate trends are top of mind. The Federal Reserve aggressively hiked rates in 2022–2023 to combat inflation, and by 2025 the federal funds rate was over 5%. So far in 2025, the Fed has kept rates steady at these restrictive levels – in part because inflation, while improved from its peak, remains above target and also due to new inflationary pressures like tariffs. The IBISWorld analysis notes that the Fed’s decision to keep interest rates elevated through 2025 has contributed to a slowdown in construction and investment. High interest rates directly impact industrial real estate: they increase borrowing costs for developers and investors, cool consumer spending on goods (especially big-ticket items that drive warehouse volumes), and strengthen the dollar (making U.S. exports pricier, potentially dampening manufacturing demand). The current consensus is that the Fed may only begin cutting rates in 2026 if inflation convincingly falls – until then, expect borrowing costs to remain a headwind for industrial expansion. Long-term rates (10-year Treasury yields) have also been volatile, recently pushing near multi-year highs. Mortgage rates and cap rates could remain elevated in the near term as a result. For underwriting, this means assuming the cost of capital stays relatively high for the next few years, rather than reverting to the ultra-low rates of the 2010s.

Trade policy – especially tariffs – is another swing factor. The current administration has either maintained or introduced tariffs on various imports (from steel and aluminum to consumer goods) as part of a protectionist stance. These tariffs have a dual impact on industrial real estate. On one hand, they increase costs for construction materials (steel, aluminum, lumber), which can disincentivize new construction or squeeze contractor margins. On the other hand, protectionist policies can encourage on-shoring: companies may choose to manufacture domestically to avoid import tariffs, thus potentially increasing demand for manufacturing facilities in the U.S.. Indeed, federal incentives and trade measures have spurred some new semiconductor fabs, EV battery plants, and other factories. But these positive effects are long-term and uneven. In the short term, uncertainty around tariffs has created volatility in supply chains and inventory strategies. Some retailers front-loaded imports before tariffs hit (causing the Q1 GDP quirk), and now might scale back. Others are holding off on expanding distribution until there’s clarity on costs. As the AIA Consensus Forecast notes, ever-changing tariff policy has introduced unusually high uncertainty, making it hard for companies to plan supply chains and thus capital projects. Tariffs are also potentially inflationary (though studies suggest temporary tariffs might not have a large sustained effect if they’re rolled back), which in turn keeps interest rates higher for longer – a negative feedback loop for real estate. For industrial property, the key point is: trade restrictions protect some manufacturing (boosting specific industrial uses) but simultaneously threaten import-reliant logistics demand and contribute to higher costs. Warehouse markets tied closely to import flows (West Coast ports, some East Coast ports) could see softer tenant demand if tariffs curtail trade volumes, whereas interior markets tied to domestic production might see a boost.

Federal incentive programs and spending have played a role in industrial real estate – and recent changes are worth noting. Over 2021–2024, major federal legislation (Infrastructure Investment and Jobs Act, CHIPS Act, Inflation Reduction Act) pumped money and incentives into manufacturing, infrastructure, and clean energy projects. This catalyzed a surge in manufacturing construction: U.S. manufacturing construction spending hit a record $230+ billion in 2024 (boosted ~20% by these programs). Warehouse development also initially rode the wave of stimulus (particularly as e-commerce boomed). However, by 2025 there has been a pause or slowdown in some of these federal incentive programs. In fact, with a new administration taking office in January 2025, there were moves to freeze or reassess certain funding streams. Notably, the Inflation Reduction Act’s implementation was partially frozen in early 2025, creating uncertainty for projects in renewable energy and EV supply chains that the IRA was set to support. IBISWorld explicitly highlights that the Trump Administration’s freezing of IRA funding in January 2025 may threaten segments of industrial construction. Additionally, the government has faced budget showdowns and a greater focus on fiscal restraint, raising the possibility of cutbacks or delays in infrastructure spending. As per the AIA, there’s concern about rescinding previously approved spending (a “rescissions package” of ~$10B was mentioned). Any pause in federal incentive programs – be it clean energy credits, advanced manufacturing grants, or infrastructure contracts – directly affects the pipeline of industrial projects. For example, if grants for new battery factories are delayed, those projects might not move forward on the originally expected timeline, tempering demand for construction and potentially for related warehouse space. Conversely, where federal money continues to flow (e.g. IIJA-funded infrastructure jobs), it helps sustain industrial contractors and materials suppliers, indirectly supporting industrial space demand. For now, the net effect seems mixed: manufacturing construction, after a banner 2024, is expected to see a modest decline (~2% in 2025) as some of those one-time boosts abate. Warehouse construction, which was already cooling, continues to decline (~–5–6% expected in 2025 after nearly –20% in 2024), due to the private market oversupply and lack of new incentives in that area.

Other policy and macro factors include: labor market and costs – unemployment is around 4.3% (August 2025) and construction labor is extremely tight, with hundreds of thousands of unfilled jobs. Immigration policy changes have exacerbated the construction labor shortage (a significant portion of construction workers are foreign-born, and stricter immigration has reduced that labor pool). This labor shortage keeps construction costs high and timelines long, which in a paradoxical way restrains over-building (benefiting existing assets) but also slows down build-outs for tenants. Additionally, rising wages in warehousing jobs (partly to attract scarce labor and due to higher minimum wages in some states) are affecting occupiers’ cost calculations. Finally, energy prices and transportation costs – fuel price swings can influence supply chain decisions (e.g., higher diesel costs might make companies reconsider how far their distribution centers are from consumers).

In summary, the macro context is one of cross-currents: a resilient but slowing economy, restrictive monetary policy, shifting trade and industrial policies, and an uncertain political climate. For industrial real estate, this means both opportunities (on-shoring, infrastructure spending, etc.) and risks (recession, high rates, trade disruptions). The baseline outlook assumes moderate economic growth with slower consumer spending growth (Oxford Economics expects retail spending to remain positive but slow considerably in 2025 in real terms). Under that scenario, industrial demand should continue growing modestly, just below new supply growth for a few more quarters. If a downturn hits, the sector could see a temporary contraction in demand (as happened in early 2025 with inventory corrections). Importantly, once the current uncertainty fades, industrial real estate is poised to remain a favored sector – the structural drivers (e-commerce adoption, supply chain reconfiguration, on-shoring manufacturing, population migration to Sunbelt, etc.) are intact. But the timing and strength of a rebound will depend on these macro factors aligning favorably.

Implications for Underwriting and Strategy

For lenders and investors in industrial real estate, the current state of the market calls for a measured, highly analytical approach. The days of indiscriminately aggressive underwriting (counting on breakneck rent growth and ultra-tight vacancies) are over, at least for now. Instead, participants should emphasize risk-adjusted returns, careful market/asset selection, and robust contingency planning in their strategies. Here are key implications and strategies:

• Underwriting Rent Growth Realistically: After averaging ~5–10% annually in 2020–2022, rent growth has now flattened to ~1% nationally. Underwriting should assume minimal near-term rent growth (perhaps 0–2% annually for the next couple of years) unless you have a compelling case otherwise (e.g. a specific small-bay asset in a supply-starved submarket). In fact, for bulk logistics space in oversupplied markets, it may be prudent to model slight rent declines or extended free rent/abatement in the lease-up period to remain conservative. Only beyond 2026 might we expect market rent growth to revert towards its ~3% historical average, and even that will hinge on vacancy tightening again. Bottom line: use modest rent growth assumptions and focus on creating value through leasing, not relying on market lift.

• Vacancy & Lease-Up Assumptions: Build in higher vacancy and longer lease-up periods in pro formas, especially for new developments or value-add deals. The average time to lease space has nearly doubled from a few years ago, and market vacancy is elevated, so factor that in. For example, if acquiring a vacant or near-term rollover big-box warehouse, underwrite a generous downtime (perhaps 6–12 months to secure a tenant, depending on the market) and consider the need for concessions (e.g. a few months free rent, TI allowances). Even stabilized assets should be stress-tested for a scenario of a major tenant downsizing or defaulting. Lenders will likely require higher debt service coverage buffers knowing that vacancy could surprise on the upside. It’s wise to budget higher operating reserves and capital reserves to weather any occupancy dips in the next couple of years.

• Cap Rate and Exit Yield: Given the rise in cap rates, revisit exit cap assumptions. No longer can one assume a flat or lower cap rate at sale like many did in 2019–2021. A conservative practice is to underwrite a +25 to +50 bps higher exit cap than going-in cap, unless you’re starting at a very high cap already. Even though cap rates might compress again if interest rates fall in the future, you shouldn’t bank on it. That said, industrial remains attractive, so if buying at a 6.0% cap today, an exit at 6.5% in 5 years is a reasonable conservative assumption. Also consider your exit buyer pool: will institutions pay a premium for your asset’s quality/location? Or will it be a private buyer expecting a higher yield? Align exit cap with that likely audience and the interest rate environment outlook at that time horizon.

• Financing and Leverage: With debt more expensive, optimize capital structures for flexibility. Many borrowers are using lower leverage (50–60% LTV) to keep debt service manageable and avoid interest rate stresses. It may be worth bringing in equity partners or accepting a lower return on equity in exchange for safer leverage during this high-rate period. If using leverage, consider interest rate hedges or fixed-rate loans to manage rate risk (though fixed loans may come with higher coupons, they offer certainty). Lenders are scrutinizing underwriting more stringently now – expect lower LTVs, higher DSCR requirements, and more recourse or guarantees for construction loans. Be prepared to demonstrate strong pre-leasing or unique demand drivers for any spec development to secure financing. On acquisitions, ensure your deal can still meet debt yields under higher interest rate scenarios; stress test with interest rates a couple percentage points above current to see if the property’s NOI could support refinance if needed.

• Asset Type and Size Strategy: Given the segment bifurcation, investors may consider pivoting toward the “safer harbor” segments in the short term. Small infill warehouses, truck terminals, cold storage, and manufacturing facilities with sticky tenants all have more defensive demand profiles right now. These might be pricier on a cap rate basis (small and specialized assets often trade at lower yields), but their income streams could be more reliable in a downturn. Conversely, if you pursue large modern distribution centers, focus on absolutely prime locations (close to major population centers or intermodal infrastructure) and best-in-class specs that will make the asset stand out to tenants. Weigh the competition: in markets flush with new supply, what differentiates your building to capture demand? It could be clear height, trailer parking, access, labor pool proximity, etc. Build-to-suit development is another strategy – securing a tenant first before building – which remains viable even in slower times because some users still have specialized needs that the existing inventory can’t meet. In the current climate, a pre-leased development is far preferable to speculative building from a risk standpoint (and lenders will strongly prefer or even require pre-leases).

• Geographic Focus: Market selection is crucial. It may be prudent to tilt portfolios toward markets with enduring high demand and higher barriers to supply (coastal/global gateway markets, diversified economies, major logistics crossroads) for stability. But there is also a case for strategic plays in oversold markets – for example, a strong asset in a Phoenix or Dallas, bought at a discount now, could perform extremely well in the long term once the oversupply is absorbed. The key is thorough market analysis: examine each target market’s pipeline, net absorption trend, tenant industries, and economic drivers. Markets tied to secular growth (Sunbelt population boom, manufacturing revival, etc.) will likely recover faster. Ensure your underwriting in softer markets includes extra leasing downtime and possibly differentiated marketing budgets to win tenants. Regional disparities in performance will persist, so a portfolio approach that balances high-growth/high-volatility markets with steady core markets can be wise.

• Risk Mitigation and Covenants: Lenders, in particular, should enforce prudent covenants and monitor performance closely. Debt service reserves, completion guarantees (for construction), and leasing milestones can protect against downside scenarios. Given that some forecasts warn vacancy could rise further and rents could decline if a recession hits, it’s important to structure loans with cushion. Borrowers should likewise build contingency in project budgets (e.g., add 10% contingency on construction costs, anticipating possible material price increases due to tariffs). For existing assets, consider hedging exposure to single large tenants – diversify lease expirations so you’re not caught with too much space rolling during this weak period. Evaluate tenant financial health too; an economic slowdown could pressure smaller tenants, so know your rent roll’s credit quality.

• Watch Macroeconomic Signals: Keep an eye on macro indicators that particularly impact industrial real estate. For example, inventory-to-sales ratios in retail, ISM manufacturing indexes, port cargo volumes, and truck freight indices are bellwethers for warehouse demand. If you see retailers cutting back inventories significantly, that could foreshadow slower leasing. Likewise, monitor policy changes – a resolution or reduction in tariffs could unleash pent-up trade (good for port markets), whereas an escalation would do the opposite. If interest rates start to trend down (perhaps late 2025 or 2026), be ready to act quickly, as easing financing costs could bring back investor competition and firm up cap rates. Conversely, if inflation surprises to the upside and rates rise more, be prepared for a longer lull in the transaction market.

• Long-Term Perspective: Even as we emphasize near-term caution, maintain a long-term perspective. The industrial sector’s fundamentals (growing e-commerce logistics needs, decentralized supply chains, on-demand delivery expectations, re-shoring manufacturing) remain compelling. The current high vacancies in some areas are likely a cyclical issue, not a structural one – essentially a supply overshoot that will be absorbed as the economy and demand catch up. Indeed, once the economy stabilizes, capital is expected to continue favoring industrial assets due to their strong rent growth history and relatively predictable capex. Smart investors can use this period to position themselves: lock in assets or loans while others are sitting on the sidelines, but do so with eyes wide open about near-term headwinds. For lenders, this may be a time to lend to top-tier sponsors on quality projects with solid fundamentals – as some marginal players have exited – but structuring deals conservatively will ensure you’re protected if the recovery takes longer.

Conclusion:

As of Q3 2025, the U.S. industrial real estate market is experiencing a healthy normalization. The sector that could seemingly do no wrong in the last few years has hit a speed bump – higher vacancies, slower rent growth, and higher cap rates are the new reality, driven by a mix of supply digestion and macro pressures. However, industrial real estate remains fundamentally on solid footing compared to other asset classes. Demand drivers are still present, just tempered. For lenders and investors, the focus should be on rigorous analysis and selectivity rather than broad-brush optimism. The current environment rewards those who can discern which markets and assets will remain resilient and which might struggle longer with oversupply. Underwriting assumptions must be reset to current realities: moderate growth, ample supply competition, and a higher cost of money. Yet, within these challenges lie opportunities – to finance or acquire assets at more reasonable prices, to reposition properties to meet evolving tenant needs (such as adding more loading docks or trailer parking to older sites to make them competitive), and to build relationships with tenants who now have choices (creative deal-making can secure credit-worthy occupiers for the long term).

Industrial real estate has always been tied to the real economy’s fortunes. As the economy moves past this policy-driven uncertainty and finds its next equilibrium, the industrial market should again find its groove. In the meantime, prudent underwriting and strategic capital allocation will ensure that when the clouds lift – whether that’s in 12 months or 24 – portfolios are well-positioned to reap the benefits of the industrial sector’s enduring strengths. The advice for now: stay informed, stay patient, and stick to fundamentals – both in deals and in the boxes themselves. The warehouses that fueled America’s pandemic-era economy are still very much needed; it’s just time for a pit stop and tune-up before the next leg of the journey.

October 24, 2025, by a collective authors of MMCG Invest, industrial feasibility study consultants.

Sources:

• MMCG Industrial Market Database (Q3 2025) (market fundamentals, absorption, rent, cap rates)

• MMCG/CoStar National Industrial Report, Oct 2025 (leasing trends, vacancies, investor activity)

• AIA Consensus Construction Forecast, July 2025 (construction spending trends for manufacturing and warehouse facilities)

• Federal Reserve Senior Loan Officer Survey (July 2025) (credit conditions for CRE loans)

• Oxford Economics/U.S. Macro Data via MMCG (GDP, consumer spending, retail outlook)

• Additional public data via U.S. Census and BLS (construction spending, labor market) and NAIOP/industry reports (policy and labor considerations).