The pandemic was a defining moment for industrial real estate throughout the country. While offices were shuttered, most industrial real estate assets were deemed essential and continued to operate throughout the pandemic. This created a spike in values for industrial real estate assets not seen in modern times. Along with investors looking to deploy capital into industrial real estate, we experienced a surge in demand due to the transition our economy made during the pandemic to online commerce. A ±31% increase in e-commerce in a span of 12 months created an unprecedented demand for industrial real estate space, namely warehousing.

The current warehouse vacancy in the United States today is approximately 7.3% compared to just below 3% during the peak years of 2022 and 2023. Vacancy rates throughout the United States significantly vary market to market. A market such as the greater Chicagoland market is seeing vacancy around 4.6% while outlier markets and emerging markets are carrying higher vacancy rates closer to 10%. This is due to an abundance of speculative industrial that was developed and delivered post pandemic. Construction deliveries for new speculative industrial developments are estimated to have dropped by ±35% in 2025 and we anticipate a similar or slightly greater reduction for delivery of Industrial Spec product in 2026. Infill well established industrial markets remain tight on space and are continuing to see redevelopment and strong interest for industrial speculative projects. The cost of capital has nearly doubled from the spring of 2022 to the spring of 2025. This has had an impact on developer appetite and capital partner participation in speculative industrial projects for secondary and tertiary markets. The reduction in industrial speculative development in 2025 and 2026 will provide a built-in governor for the overall market and balance supply with demand, creating a more stable and predictable warehouse environment moving forward.

The start and stop nature of tariffs created a surge in demand for warehouse space earlier in 2025 as manufacturers and wholesalers built up their inventories to try to get ahead of anticipated tariffs. In the second quarter, companies paired back orders and paused decisions on leasing industrial space as tariffs were announced and/or enacted. Most recently in the third quarter, we see renewed demand from manufacturing and auto sectors and an overall more stable environment. Well-located infill industrial assets remain in high demand due to factors such as infrastructure and more importantly, labor. Despite a recent uptick in the unemployment rate (±4.3%) labor is a critical concern for most all the occupiers of industrial space. The recent uptick in unemployment is largely limited to white collar employment, immigration patterns and new enforcement procedures create a further tightening of the blue-collar labor market. The impact of labor keeps occupiers of industrial space limited in their pursuit of additional space that does not fit within a tight geographic window of current operations.

Zoning restrictions, labor, and infrastructure will remain key drivers of where decision makers elect to expand. Currently the uncertainty of tariffs has created a lull in demand for large warehouse space (200,000 sf and up) and e-commerce facilities. Despite a challenging domestic freight market, demand remains solid for infill transportation properties that provide maintenance capacity for trucks as well as extra land for trailer storage. Space remains tight for small infill industrial properties (under 100,000 sf) and construction costs for industrial remain elevated as labor is typically 50% of the cost for new industrial facilities. We note an increase of sublease space being brought to market over the past 6 months. Sublease space is typically not included in calculating vacancy rates. If the pattern of increased sublease space continues, we have concern for the overall vacancy rate of domestic industrial moving forward.

Without definitive agreements in place concerning tariffs, the next 6 months will likely remain volatile in the industrial real estate market. A decrease in the cost of capital is anticipated, and this could provide a jump start to the stagnant residential real estate market. A strong residential market lifts the industrial market through increased activity in remodels, expansions and improvements that drive the need for textiles, appliances, cabinetry, flooring, etc. A combination of an improved residential market and the end to tariff uncertainty would be the best path forward for the industrial real estate market.