Industrial Real Estate Enters New Era of Smart Growth

Industrial real estate is now entering a new era of smart growth, based on optimizing supply chains, advanced technology initiatives and sustainability, according to PWC and the Urban Land Institute’s latest report on emerging trends in real estate in 2025.

Following the pandemic, companies rushed to construct new logistics facilities, resulting in oversupply. As a result, speculative development fell 43% in 1H 2024 compared to the prior year – a trend expected to continue into 2025. Leasing activity also slowed in 2023 and 2024. The report predicts that it is about to change with more high-quality options that will be part of “a strategic, deliberate approach to growth that will shape the future of the supply chain.” However, leasing activity will be more moderate than experts anticipated.

In the first half of 2024, there were 80 million square feet of net absorption – 37% less than in the same period in 2023. Leasing nationwide rose 5% — an outcome attributed to lower rental rates and considered a leading indicator of net absorption.

More stakeholders are being included in decision-making and reevaluating business models. “C-suite executives and supply chain consultants have become involved with day-to-day leasing, leading to extended deal-making timelines,” the report noted. Leasing will focus on tactical approaches and cost optimization to increase revenues, optimize expenditures and maximize resources.

Meanwhile, efforts to mitigate risks and move goods closer to the end consumer will continue, the report said. To diversify, manufacturing facilities in India and Mexico are expanding, a trend driven by onshoring and nearshoring. While the pace of onshoring to the U.S. has slowed due to limited land availability and higher operational costs, foreign direct investment in Mexico increased 27% in 2023. Chinese manufacturers continued to move operations into the country as demand in border markets in both Mexico and the U.S. surged.

Industrial tenants in the U.S. are confronting heightened capital constraints while focusing on optimizing operating margins, capital outlay and resource needs – especially access to power and water as companies use more energy intensive technologies.

One source in the report identified power availability as second only to location in leasing decisions. California, Phoenix and Nevada are already facing supply challenges. With rising temperatures in some southern states, high-power control and technologically advanced facilities increase the power needed to fuel modern logistics facilities. “Battery and solar capabilities have continued to gain traction in key logistics markets that experience brownouts on a more frequent basis,” the report noted.

One effect of the inflow of modern, high-quality inventory is that build-to-suit properties are in less demand, except for certain tenants. Build-to-suit absorption is expected to fall by 50% in 1H 2025.

As part of the smart growth movement, the use of technology is rapidly rising. The report noted that conventional AI is widely used across different sectors, especially customer support automation. “For internal warehouse operations, adopters focus on optimizing pick stations and throughput rates, capitalizing on existing labor, and helping increase efficient operations…Companies are now adopting quick-fix solutions – such as automated warehouse robots to transport goods throughout the facility.”

Supply chain visualization technology relying on predictive models is also being used for inventory management and accuracy and monitored by supply chain analysts. Since data integrity is crucial for accurate modeling, optimized warehouse and network design have become crucial, especially for larger, well-funded companies to manage inventories and complex supply chains and to optimize financial overheads, the report said.

Sustainability measures that will be gradually implemented are also being in development. Environmental initiatives, including net zero goals and state and local regulations, are helping drive adoption. “An estimated 40% of industrial users have adopted net-zero goals as of 2024, compared to less than 10% in 2019,” the report noted.

Meanwhile, industrial deal volumes have stabilized after declining in 2023 and are consistent with pre-pandemic levels. Transaction volumes declined in areas with sluggish demand like Los Angeles but rose in markets with strong dynamics like Dallas.

“Cross-border investors remain active, favoring portfolio and entity deals. Investors continue to view industrial real estate as a stable long-term asset class due to stronger prospects of income growth,” the report stated.