Demand for U.S. industrial space—especially in the warehouse sector—fell for the first time in fifteen years during the second quarter of 2025, signaling a dramatic shift in commercial real estate dynamics since the pandemic-era boom. This decline was marked by an 11.3 million square foot contraction in the second quarter alone, with total net absorption at just 27 million square feet for the first half of the year. Industry analysts attribute this downturn primarily to ongoing economic uncertainty, rapidly changing tariff policies, and persistent inflation, all of which have made companies cautious about expanding or renewing leases for industrial properties.
Shifting Market Conditions
The once-hot warehouse and logistics sector benefited from surging e-commerce and supply chain expansion during the pandemic, but by 2022, waning demand began to emerge. The most recent data indicates that new supply continues to outpace demand, pushing the national industrial vacancy rate to a multi-year high of 7.1–7.4%, the highest since 2014 and well above the record low of 2.8% registered in mid-2022. Large logistics facilities, especially in coastal markets reliant on imports, have been hit hardest; in some areas, vacancy now exceeds 10%.
Impact of Tariffs and Inflation
Macroeconomic instability has proven especially disruptive. Uncertainty around tariffs—particularly renewed U.S.-China trade tensions and new import taxes introduced in early 2025—has led occupiers to delay leasing decisions, while high inflation has eroded purchasing power and curtailed corporate expansion. An initial import surge ahead of new tariffs briefly boosted warehouse utilization on the West Coast, but volumes quickly dropped and inventory levels normalized, limiting further demand.
Rent and Lease Trends
Industrial rent growth has decelerated sharply, rising only 1.7% year-over-year nationwide—the lowest rate since 2012. Some markets even saw outright rent declines; for example, Los Angeles and the Inland Empire posted drops over 10%. This cooling in rental pressure is shifting negotiating leverage toward tenants, with landlords offering more concessions such as free rent and shorter lease terms on bulk deals. Over one-third of all U.S. industrial leases will expire by 2027, with many under-priced compared to current asking rates, setting the stage for further tenant-friendly conditions.
Modest Sales and Future Outlook
Despite the lackluster leasing activity, industrial property sales have remained stable, with 2024 volumes up 14.7% compared to 2023 but below the record highs of 2021. Most forecasts anticipate the sluggish demand trend will persist through the rest of 2025, with NAIOP predicting flat absorption for the remainder of the year. Recovery is projected to begin in late 2025 or early 2026 as companies adapt to new tariff environments and economic volatility subsides, but growth is likely to be much slower than the historic highs of the early 2020s.
Sector Implications
The first drop in industrial leasing since 2010 underscores how global economic factors and construction cycles have fundamentally altered the warehouse and logistics real estate landscape. While inflation and trade uncertainty remain threats, normalization and renewal activity in 2026 could restore momentum—albeit at a reduced pace. Until then, tenants are better positioned to negotiate, while investors and developers face increased risk from oversupply and slower demand.
More information is available here.
Above image: Pixabay.com
You must be logged in to post a comment.