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  • Writer's pictureRealFacts Editorial Team

Resilience and Opportunities: Industrial REITs Navigate Near-Term Challenges

Industrial real estate

Industrial REITs are currently navigating a landscape characterized by slower leasing demand and increased supply. However, there are positive signs for the sector, including heightened leasing activity by Amazon, a reduction in new construction starts, and a rise in localized manufacturing. The latest data from the Nareit Total REIT Industry Tracker Series (T-Tracker®) report highlights the ongoing strength of the industrial sector, with average occupancy at 96.1% in the first quarter, compared to 93.2% for all equity REITs.

According to Sarah Borchersen-Keto, leasing activity has slowed across all regions as businesses recalibrate inventory levels and respond to higher interest rates. Despite this, net absorption has remained consistent with pre-pandemic levels, indicating a return to normal growth. Camille Bonnel, a REIT analyst at Bank of America Global Research, corroborates this view, noting that businesses have shifted their focus towards optimizing costs. Vince Tibone, head of U.S. industrial and mall research at Green Street, observed that net absorption in the first quarter was significantly lower than in 2023, and supply completions have added to vacancy rates. However, both analysts see early signs of demand returning later this year.

Tibone's recent report from Green Street indicates a downward revision in demand forecasts for 2024 and 2025, driven by concerns over supply chain capacity and lower retail sales estimates. In contrast, Bonnel sees a more encouraging outlook with higher leasing volumes in key markets, spurred by Amazon's expansion and competition from other e-commerce players.

Demand varies significantly across different geographic markets and tenant types. Tibone pointed out that demand is weakest in coastal markets with previously low vacancy rates, while Bonnel highlighted that Southern California has moderated from peak levels but remains a key market. Smaller, infill buildings continue to see strong demand, whereas mid-sized buildings face challenges due to elevated speculative deliveries.

New development starts have decreased significantly, translating into lower supply deliveries in the latter half of 2024 and beyond. Bonnel emphasized that over 70% of the pipeline is expected to deliver in the first half of this year, creating a gap in new space availability.

Near-shoring and on-shoring trends are still unfolding, with significant investments in sectors like semiconductors and electric vehicles. This is expected to drive incremental demand for industrial space in certain U.S. markets over time.

Both analysts are watching trends in consumer spending and delivery speeds. Bonnel noted that infill development close to consumers is becoming more challenging due to land availability and zoning regulations. REITs with strong platforms and well-located portfolios are best positioned to benefit from these dynamics. Tibone highlighted the ongoing reversion of consumer spending from goods back to services, which could impact near-term logistics demand.

Industrial REITs appear well-positioned to weather current challenges, supported by strategic market trends and robust underlying demand. Investors should monitor these developments closely to understand their implications for the sector's future performance.


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