After a promising start to the year, the U.S. industrial market experienced modest retrenchment with 1.3 million square feet in negative net absorption during 2Q25—the sector's first negative quarter in over 15 years. Despite robust leasing velocity, many tenants are focused on optimizing their supply chain rather than expanding footprints, while favoring the most modern, efficient space. Build-to-suit projects are capturing a greater share of a shrinking development pipeline, which contracted for the eleventh consecutive quarter, marking the longest period of decline recorded this century.
Economic Conditions and Demand Drivers
- In the first half of 2025, consumer sentiment and inflation expectations have fluctuated about as frequently as U.S. tariff rates. Topline economic data held up reasonably well considering persistent policy uncertainty but are now signaling a stagflation impulse.
- The full effect of the highest tariffs since the 1930s has yet to be realized. Their influence will be constrained by the fact that imported content accounts for only about 11% of total U.S. consumption, but the impacts on international trade have been and will continue to be significant.
- U.S. manufacturing construction spending measured $116 billion in June 2025, nearly double the pre-pandemic five-year average, with the South capturing the majority of this investment. While spending remains historically high, it has trended lower recently as manufacturers navigate U.S. policies that both challenge and benefit new factory project kickoffs.
Leasing Market Fundamentals
- After a promising start to the year, the market experienced modest retrenchment with 1.3 million square feet in negative net absorption during Q2 which is essentially flat, but marks the first negative quarter in over 15 years. While leasing velocity remains robust, most activity may not be in the service of expanding total occupancy as many tenants are consolidating and restructuring to preserve margins.
- Overall market vacancy rose 30 basis points to 7.4%, the highest level in more than a decade. Vacancy is highest in newly-delivered product but is coming down swiftly year-over-year. Conversely, older-vintage properties are experiencing modest increases in vacancy rates.
- The development pipeline contracted for the eleventh consecutive quarter, with 282 million square feet under construction, the lowest level since 2018.
Capital Markets
- First-half 2025 industrial sales volume is up 12% compared to 2024, as second quarter volume remained relatively flat. While industrial volume hasn’t decreased, it has lagged the overall 16% CRE growth rate.
- Industrial cap rates have fluctuated over the past 12 months, remaining in the 5% range, which will likely be the case throughout 2025.
- Across the ecosystem of investor profiles, private capital continues to account for nearly half of total acquisitions. Users have boosted their acquisition share substantially during the last few years, achieving 10% market share in 2Q 2025.
Outlook
- Predicting peak vacancy is a challenge this year due to macro uncertainty. Depending on how net absorption plays out, vacancy could range from 7.5% - 7.7% by year-end.
- Tighter labor and higher input costs combined with more subdued occupier demand could result in further downward pressure on new starts in most markets, although the pipeline deceleration is likely to plateau at 2017-era levels by year-end.
- Turbulence should be anticipated in the second half of the year following in the wake of pre-tariff inventory drawdown. The economy and the industrial market will likely continue to reflect a mix of competing forces—some supportive, others restraining—as businesses and consumers navigate an unsettled landscape.
