US Industrial Real Estate Outlook: Headwinds and Opportunities

As a company dedicated to helping our clients make informed investment decisions, K2

Investment closely monitors shifts in the commercial real estate market. The latest

data on the U.S. industrial sector presents a nuanced picture, suggesting a period of

adjustment after years of rapid growth.

According to recent analysis, the industrial market is facing some headwinds, primarily

driven by moderating tenant demand and broader economic uncertainties. While the

sector's long-term fundamentals remain strong, the near-term outlook calls for a more

cautious approach.

Key Market Shifts and What They Mean for Investors

•  Softening Demand and Negative Absorption: After a period of robust

expansion, net absorption—the net change in occupied space—turned negative

in the second quarter of 2025. This is the first time in 15 years that logistics

tenants have vacated more space than they've occupied, a trend fueled by

retailer bankruptcies and cautious leasing by major players like The Home Depot

and FedEx. This suggests that businesses are rightsizing their logistics footprints

in response to market uncertainty.

•  Rising Vacancy Rates: The national industrial vacancy rate has climbed to

7.4%, its highest level in over a decade. Projections now anticipate this rate will

continue to rise, potentially reaching 8% by the second half of 2026 before

stabilizing. This increase in available space puts downward pressure on rental

growth and requires a longer-term perspective on recovery.

•  Flattening Rent Growth: Corresponding with the rise in vacancies, national

average rents have stalled, showing no quarterly increase. While annual growth

is still positive at 1.6%, the forecast suggests this stagnation will continue through

late 2025. We don't expect to see significant rent acceleration until vacancy rates

begin to decline, likely in late 2026.

• Disparity in Performance: Not all industrial properties are feeling the same

pressure. While large logistics facilities (100,000 sq. ft. and larger) are seeing a

notable slowdown, smaller-bay buildings have shown greater resilience. This

indicates a potential shift in demand towards more flexible, smaller-scale logistics

solutions.

What's Driving the Changes?

A key factor influencing the market is increased macroeconomic uncertainty, particularly

around trade. Slower retail sales growth and an expanded U.S. trade war have made

retailers and logistics providers hesitant to build up their inventories. This cautious

stance directly impacts the need for new warehouse and distribution space.

K2 Investments’ Perspective: The Long-Term View

While the current data points to a delayed recovery in the industrial sector, the long-term

outlook remains positive. The market is not in distress but rather undergoing a

necessary correction.

• Future Stabilization: A moderation in new construction is expected to allow

demand to catch up with the existing supply. This should enable absorption to

turn positive again by late 2026, paving the way for a more stable market.

• The Path to Recovery: We anticipate the national vacancy rate to fall below 7%

by 2028. The timing of this recovery will depend on factors like easing trade

tensions and potential fiscal stimulus.

At K2 Investments, we see this period as an opportunity to identify strategically located,

high-quality assets that will be well-positioned for the next cycle of growth. We advise

our clients to focus on properties with strong fundamentals and to consider the

resilience of different sub-sectors within the industrial market. Navigating this

environment requires a nuanced understanding of market dynamics, and we are

committed to providing our clients with the expertise needed to succeed.