When the pandemic hit in 2020, industrial real estate shifted almost overnight. With consumers shopping primarily online, demand for e-commerce distribution and logistics facilities spiked, creating the largest wave of new construction the sector has ever seen — and driving up costs across the supply chain.
The Pandemic Surge
Before COVID, the record for quarterly industrial construction starts across the nation was about 110 million square feet. In 2021 and 2022, that figure jumped to an average of 140 million square feet per quarter. Long story short, developers responded to unrelenting space demand with substantial development, breaking ground on new industrial product with roughly 70% of projects built without having a tenant in place.
Source: costar.com
Oversupply Takes Hold
As consumers returned to stores and e-commerce growth normalized, demand for industrial space slowed. At the same time, interest rates were rising, which increased borrowing costs and slowed spending. The combination of elevated supply and tighter capital markets created pressure across the sector — translating into rising vacancies, and new negotiating leverage for occupiers.
Source: costar.com
In recent years, the market has simply been oversupplied with industrial space — particularly large distribution properties.
A Necessary Correction
Over the past two years, the market has adjusted. New construction has dropped significantly, averaging about 70 million square feet per quarter — roughly half of the pandemic peak. By 2025, construction starts had fallen to 10-year lows, helping to allow vacancy rates to stabilize.
This slowdown in new supply is helping to get the industrial market back on track. While there is still a fair amount of industrial space available, conditions over the next 12 to 24 months should bring supply and demand into better balance.
What Tenants Should Watch
Several factors will influence how quickly the industrial market strengthens:
- Tariff policy — Trade decisions may increase U.S. manufacturing demand or add inflationary pressure.
- Rates — If the Fed cuts rates, spending could pick up, but so could development activity.
- E-commerce growth — While brick-and-mortar retail has regained ground, online sales remain a long-term driver of demand.
Source: fred.stlouisfed.org
Bottom Line
Industrial real estate is no longer in the “bulletproof” category it appeared to occupy during COVID, but that isn’t a negative. The sector is moving toward a more sustainable footing, where supply and demand are in balance.
For business leaders, this creates a window of opportunity. Elevated vacancy give finance leaders leverage to negotiate lower occupancy costs, secure greater flexibility, and lock in terms that protect margins as the market rebalances over the next 12 to 24 months.
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