As we approach 2025, the industrial real estate market is undergoing significant shifts, while newfound geopolitical uncertainties could shape the sector’s trajectory for years to come. With key factors like supply-demand imbalances, capital market trends, and demand drivers such as e-commerce and near-shoring influencing market dynamics, investors and industry stakeholders are closely monitoring how these trends will unfold.
Supply-Demand Imbalance and Vacancy Impact
One of the more notable trends is the growing supply-demand imbalance in the industrial sector, which is leading to some slowdown in rent growth, primarily in large distribution centers. The rising availability of big-box warehouse space is placing downward pressure on market rental rates. As landlords work through leasing up this excess space, they may be forced to offer lower rents or incentives to attract tenants, contributing to a potential rent plateau or decline in the short term. On a positive note, developers in this cycle were relatively quick to pause new warehouse development, leading many to speculate a return to balance in late 2025-2026.
Meanwhile, the light industrial sector, which includes smaller facilities used for light assembly, R+D, showroom, and local distribution, is experiencing a different trajectory. These smaller spaces continue to see strong demand, resulting in tight market vacancy and minimal exposure to the supply imbalance affecting larger properties. Consequently, rent growth in the light industrial sector remains robust, highlighting a significant disparity between the bulk and light industrial segments. While bulk industrial properties face challenges with vacancies and rent growth stagnation, light industrial properties are benefiting from sustained demand and limited supply. This supply/demand imbalance in the light industrial space is exacerbated by elevated construction costs & lack of developable infill land, as well as the reduction of supply that can be seen in some ultra-infill locations of major metropolitan areas such as Dallas-Fort Worth and Atlanta.
Capital Markets and Shift in Transaction Activity
While industrial investment sale activity has slowed, investor interest in the sector remains strong, as evidenced by continued price increases and muted yield expansion. Markets have mostly normalized, adjusting to current conditions, while the Federal Reserve’s recent interest rate cuts have ignited renewed optimism for 2025, providing relief and creating a more favorable investment environment. These rate cuts, expected to continue, should stimulate a resurgence in deal-making activity, as lower borrowing costs will create more favorable leverage scenarios than seen in the past few years. This anticipated shift is expected to increase transaction volumes, particularly within the industrial sector, which is poised to benefit from improved market fundamentals.
E-Commerce and Near-Shoring as Key Demand Drivers
E-commerce remains a crucial driver of demand for industrial space, despite a slowdown following its pandemic peak. The growing need for logistics infrastructure to support online shopping is expected to sustain demand for warehousing and distribution facilities well into the future. Another emerging trend is near-shoring, where companies relocate production closer to political allies or neighboring countries, such as Canada & Mexico. This shift should increase demand for industrial space, particularly in key U.S. border regions, further bolstering the industrial market. Another result of this trend may be renewed investor and user interest for manufacturing space or warehouse facilities with access to heavy power, providing the infrastructure necessary to conduct manufacturing operations. Although near shoring is a real phenomenon impacting the market today, and likely throughout 2025, uncertainties remain regarding the potential impact of additional tariffs that could be imposed upon major U.S. trading partners such as Mexico, Canada, and China.
Looking ahead to 2025, the industrial real estate market is poised for meaningful growth. While challenges such as supply-demand imbalances in large distribution centers may temper rent growth in the bulk industrial sector, the light industrial segment continues to thrive. Meanwhile, positive developments in capital markets, driven by interest rate cuts, and the growing demand from e-commerce and near-shoring trends provide a strong foundation for future growth. Investors and industry participants can expect the industrial market to continue its dynamic transformation in the coming year.
To learn more about Westmount Realty Capital or for additional information, contact us at info@westmountrc.com or find us at https://westmountrc.com/.
This article, and Westmount Realty Capital blogs in general, is intended for informational and educational purposes only, and does not constitute a solicitation or offer by Westmount Realty Capital, LLC to buy or sell any securities, futures, options, foreign exchange or other financial instrument or to provide any investment advice or service. Westmount is not your advisor or agent. Please consult your own experts for advice in these areas. Although Westmount provides information it believes to be accurate, Westmount makes no representations or warranties about the accuracy or completeness of the information contained on this article.
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