The U.S. industrial real estate market is entering a new phase of disciplined growth following the unprecedented expansion of the post-pandemic era. Improving fundamentals at the close of 2025, combined with slowing development activity and sustained demand, have positioned the sector for continued improvement in 2026, and a more meaningful recovery in 2027.

As new construction activity continues to moderate and demand remains resilient, market fundamentals are expected to show solid improvement over the next several years. The winners will be properties that combine strategic locations, modern functionality and reliable power infrastructure.

Nationwide net absorption totaled approximately 170 million square feet in 2025, while leasing activity reached 665 million square feet, representing an 11% year-over-year increase. Leasing volume is projected to approach 800 million square feet by the end of 2026, reflecting continued occupier demand. Vacancy rates have stabilized at approximately 8%, while asking rents are expected to resume moderate growth as excess supply is gradually absorbed.

A significant factor supporting the market’s recovery is the sharp decline in new construction deliveries. Industrial completions have fallen 37% over the past two years and development activity is expected to remain subdued through 2027. Higher borrowing costs, stricter underwriting requirements and elevated vacancy levels in many markets continue to challenge speculative development. In contrast, build-to-suit projects, which accounted for approximately 40% of new construction in 2025, are expected to represent a growing share of future deliveries as occupiers increasingly prioritize specialized, highly efficient facilities that support long-term operational objectives.

The industrial sector also stands to benefit from several enduring demand catalysts. The rapid expansion of AI infrastructure and large-scale data center development is creating new demand for advanced manufacturing, supplier networks and logistics operations. Reshoring and nearshoring initiatives, e-commerce expansion, and ongoing supply chain optimization efforts are also supporting sustained demand for industrial space across a broad range of markets and property types.

Flight to Quality Drives Demand

Similar to the office market’s ongoing Flight to Quality trend, the industrial sector continues to favor modern, efficient facilities that enhance operational performance and supply chain efficiency.

This is creating a greater demand for:

  • Ample loading docks and truck courts for efficient circulation
  • Advanced technologies such as automation, robotics and inventory management systems
  • Proximity to a qualified labor force
  • Access to highways, ports, rail networks and airports

 

Location remains the most critical operational factor for industrial occupiers, specifically those focused on last-mile distribution — the movement of goods from fulfillment centers to consumers and retail destinations. Industrial properties located in densely populated areas where deliveries can be made faster and more efficiently — sometimes same day or even within 30 minutes in some markets — are leading nationwide leasing.

Alongside location, access to reliable and scalable power has become a defining factor in industrial site selection. Driven by increasing use of electric vehicle fleets, advanced warehouse automation, onsite solar generation and the growing energy demands of data centers and artificial intelligence applications, reliable power availability is a key priority in site-selection and development decisions.

These energy demands are expected to increasingly favor the Midwest, Mid-Atlantic and Southeast regions, where established, expansive power infrastructure, proximity to a capable workforce and transportation connectivity offer growing competitive advantages.

The growing trend of companies outsourcing logistics and distribution functions is also supporting leasing demand. Third-party logistics providers (3PLs) accounted for approximately 35% of U.S. industrial leasing in 2025, with demand expected to remain strong through 2026. Companies continue to rely on 3PLs for warehousing, inventory management, fulfillment, shipping and reverse logistics to improve efficiency and control costs.

Reverse logistics requirements have also contributed to demand for specialized facilities, particularly in the 100,000- to 300,000-square-foot range, making the 3PL segment one of the strongest-performing areas of the industrial market.

As occupiers increasingly favor modern, high-efficiency facilities, questions remain about the long-term competitiveness of older industrial assets. Properties built prior to 2020 recorded more than 100 million square feet of negative net absorption in 2025, highlighting the market’s preference for newer space. As a result, landlords are facing growing pressure to modernize existing properties to remain competitive.

The repositioning of older assets is expected to become an increasingly important strategy as new construction remains constrained. While Class A space often requires premium rents and long-term commitments, upgraded Class B facilities can offer occupiers attractive alternatives through greater flexibility, lower occupancy costs and enhanced tenant improvement packages.

Large and mega-box occupiers (750,000 to 1,000,000+ square feet) will continue to drive demand for newly developed Class A space. At the same time, the growing scarcity of quality industrial inventory is expected to create opportunities for well-located, repositioned Class B assets that can meet the needs of mid-sized and smaller occupiers.

Demand Broadens Across the Industrial Size Spectrum

As overall leasing activity strengthened throughout 2025 and early 2026, industrial demand broadened across a wider range of facility sizes. While large distribution centers have driven the sector’s expansion in recent years, warehouses and distribution facilities under 100,000 square feet are attracting increased interest as occupiers adapt to evolving logistics networks, supply chain strategies, and consumer expectations. Much of this demand is being fueled by the continued growth of last-mile distribution.

The industrial market has largely split into two stories:

  • Large bulk warehouses saw a construction boom after the pandemic and have experienced rising vacancies.
  • Small- and medium-bay industrial remains undersupplied, with significantly lower vacancies and strong rent growth due to limited new construction and persistent demand from local businesses and last-mile logistics users.

 

Small-bay (generally under 50,000 square feet) and medium-bay industrial properties have emerged as one of the strongest-performing niches within industrial real estate. These buildings are closely tied to E-commerce retailers and distributors increasingly require smaller facilities located closer to population centers to support same-day and next-day delivery. This allows inventory to be positioned nearer to consumers, reducing transportation times and improving operational efficiency. However, the inventory for this size is old and limited and only 2% of new construction 2024 is small bay.

As a result, occupier demand is extending beyond traditional mega-box distribution centers to include a broader mix of strategically located facilities. Growth is also being supported by expanding requirements from light manufacturing users, building trades, medical and life sciences suppliers, technology support operations, and food and beverage distributors.

Another factor supporting leasing activity is the continued absorption of “shadow space,” or excess warehouse capacity secured during the pandemic in anticipation of future growth. Many occupiers leased substantial additional space that was not immediately required as a hedge against supply chain disruptions and rapidly changing demand.

As that excess inventory has gradually been utilized, occupiers have returned to the market in search of additional capacity. The trend has been particularly significant among 3PLs, which continue to expand operations and onboard new clients. By the end of 2025, most industrial users reported that their excess warehouse capacity had largely been absorbed.

While demand has broadened across smaller and mid-sized facilities, large distribution centers continue to play a critical role within national logistics networks. Mega-box facilities remain essential for regional fulfillment, manufacturing support and large-scale inventory management. Rather than replacing large-format distribution space, emerging demand patterns are creating a more balanced industrial ecosystem that requires facilities of varying sizes to support increasingly complex supply chains.

Future State: Transitioning to a More Disciplined Growth Cycle

Following an unprecedented period of expansion, the U.S. industrial real estate market is entering a more disciplined phase characterized by measured development, strategic site selection and a growing emphasis on operational efficiency. While the pace of growth is moderating, long-term fundamentals remain favorable as occupiers continue to prioritize modern facilities, reliable power infrastructure and locations that support increasingly complex distribution and manufacturing networks.

As supply and demand move toward a healthier equilibrium, leasing activity is expected to remain supported by evolving supply chain strategies, continued e-commerce growth, reshoring and nearshoring initiatives, and the expanding influence of artificial intelligence and data center development. These trends are expected to sustain demand across a broad range of industrial property types and facility sizes, with total leasing demand potentially approaching 1 billion square feet by 2030.

Rather than signaling a slowdown, the market’s transition reflects a return to more sustainable growth patterns. Industrial real estate is becoming increasingly defined by quality, efficiency and location advantages, creating opportunities for owners and developers that can deliver the modern facilities and infrastructure occupiers require. As a result, the sector appears well-positioned for steady, long-term growth throughout the remainder of the decade.