Demand for industrial space falls for the first time in 15 years

Five years ago, when the pandemic pushed e-commerce to new highs, the industrial warehouse space became the biggest commercial real estate play around. It began to slow in 2022, but now economic uncertainty brought on by constantly changing tariff policy and persistently high inflation is taking a greater toll on this previously hot real estate sector. 

Just 27 million square feet of space was absorbed in the first half of this year, with demand falling by 11.3 million in the second quarter alone, the first quarterly drop since 2010, according to a report from NAIOP, a commercial real estate development association.

Since the uncertainty is likely to continue through the end of this year, NAIOP therefore projects that net absorption will be “nearly flat” over the second half of this year. 

“Demand for industrial space is expected to recover somewhat after occupiers have time to adjust to a new tariff regime,” the report’s authors said. “However, higher tariffs and slowing employment growth will likely result in slower demand growth than that experienced from 2020 to 2022 or in the six years that preceded the pandemic. 

NAIOP predicts absorption will rebound starting in the second quarter of 2026, with full-year absorption totaling 119.3 million square feet. Another 109.7 million square feet of absorption is expected in the first half of 2027.

As for industrial property sales, this year they are just about matching last year’s pace of $74.3 billion, up 14.7% from 2023, but down from the all-time high of $129.8 billion in 2021, according to a separate report from Yardi. 

Price appreciation has also cooled after huge gains between 2019 and 2022, when the average sale price of an industrial property jumped 54%.

“Capital was cheap, and investors wanted to profit from record rent growth resulting from historically low industrial vacancy rates on top of supply falling behind,” the report noted.

So far this year, the average sale price for completed industrial transactions was just 6% higher than the 2022 average. 

The national industrial vacancy rate in July was 9.1%, up 10 basis points from June and up 270 basis points from July 2024. In-place rents, however, were still up 6.1% year over year. 

“We’ve watched the industrial investment market move from darling to resilient over the past few years, but we anticipate activity and interest to ramp up with the expectation of economic clarity coupled with growing demand for space,” said Peter Kolaczynski, director for Yardi Research, in a release.