Industrial real estate finds itself in an unusual position: Lease rates are decreasing while occupancy grows. Meanwhile, onshoring moves may rise due to tariffs and Apple’s recent $500 billion commitment over the next four years.
This is not exactly routine territory for even the most experienced commercial real estate professional, but the experts at Kidder Mathews are cutting through the noise. What’s in store for the industrial market as 2025 warms up?
Macro Noise in the Industrial Sector
“This pattern of a slight decline in lease rates alongside rising occupancy rates suggests a market correction following the rapid expansion during the pandemic years,” says Jeremy Green, SIOR, Kidder Mathews EVP. “Historically, such adjustments have occurred as markets recalibrate after periods of accelerated growth, aiming for equilibrium between supply and demand.”
Unlike Apple’s bold moves and shifts in federal policy, most industrial players remain cautious and measured, says Ryan McKenzie, CCIM, Kidder Mathews VP Referencing a "hyper-supply" description by Integra Realty Resources, he says, “This is not ‘recession’ categorization, so I believe what we're seeing is decompression of demand and stabilization of rates to pre-COVID levels. The pandemic acted more like a quick three-year hump of rate increase and now we're smoothing out again. I don't expect rates to drop below pre-COVID levels.”
Steadying vacancy and a deceleration in construction activity would signal a desirable shift to more dependable market conditions. Meanwhile, most REITs, or other large ownership entities, are attempting to bridge the gap between pricing and demand by offering five to six months of free rent for new tenants, McKenzie adds. Luke Staubitz, SIOR, Kidder Mathews EVP, reports the sector went largely unchanged in the fourth quarter, other than a “seeming uptick” in leasing demand during the last 30 days.
Caution Signs in Investment Sector
With supply greatly outweighing demand, industrial investors have taken a guarded approach, wary of the market surplus. Cap rates have exhibited slight upward adjustments, reflecting greater investor concerns.
“Most notably, I believe investors are keeping a watchful eye on the underlying base rent value of the deal,” says McKenzie. “Though a cap rate might look attractive, if the base rents don't match current market rates—or close to it—it's typically a pass.”
Staubitz reports that speculative, infill industrial development in Los Angeles is on hold, while new Class A supply gets “very slowly” absorbed. That’s a very different development tale compared to the recent Apple headlines, as Apple will soon double its Advanced Manufacturing Fund by building a 250,000-square-foot Houston manufacturing facility, where servers — previously made outside the US–will be created.
Tariff Effect
Amid ongoing supply and demand imbalances, the potential for new tariffs adds another layer of uncertainty to the industrial market. While intended to encourage domestic manufacturing and the reshoring of production, levies on products coming in from China, Canada, and Mexico will bring unpredictability and cause hesitation, as companies reassess supply chains and production locations to mitigate the impact.
Reshoring efforts and trade policy changes can also carry with them the risk of overbuilding and skilled workforce pressures to meet increased manufacturing demand. Kidder Mathews doesn’t see much significant positive change in the near-term.
“Local manufacturing groups who would benefit from home-soil money will likely add hours or shifts to their workforce before they occupy more space,” McKenzie says. “Moving is costly for manufacturers, and we will likely see more action in the mid-term timeline.”
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