The industrial real estate sector is preparing for a year of rebalancing in 2025, although it faces ongoing uncertainties, particularly concerning federal tariffs and lease expirations.
With the possibility of higher tariffs on imports, companies are stockpiling goods in anticipation of increased costs, which may temporarily boost demand for warehouse and distribution space. This could drive up rents or at least slow the declines that have marked the industry in recent months. However, the long-term outlook remains uncertain as market conditions evolve, leaving businesses and analysts alike unsure of what the future holds, reported the Dallas Business Journal.
The sharp rise in rental costs for many tenants will be a significant challenge for the industrial real estate market in 2025.
According to data from CompStak, more than 27% of current industrial leases are set to expire by 2025 and 2026. The situation is especially tough for tenants with expiring leases, reported the DBJ. The average rent for these expiring leases is nearly 76% lower than current market rates, meaning many businesses will face a substantial rent increase when they renew their contracts. This will put additional pressure on companies already navigating the complexities of a rapidly changing economic landscape.
Alongside rental increases, another trend in the industrial sector is the “flight to quality” seen in both office and industrial real estate.
As businesses become more selective about their spaces, older industrial buildings are left behind in favor of newer, higher-quality properties, reported the DBJ. This trend is partly driven by companies’ growing awareness of workplace quality’s role in retaining talent, particularly within the industrial sector. With over 400 million square feet of vacant industrial space available as of the third quarter of 2024, tenants will have options when their leases come up for renewal. However, these spaces will come at a premium due to their newer designs and amenities.
As the industrial market adjusts to these changes, one of the key factors to watch will be how companies adapt to rising rents and limited space options. For those with leases expiring in 2025 and 2026, securing a favorable renewal or relocation deal will be critical to their bottom lines. Despite the increased availability of new industrial space, the premium rents for these newer properties may deter some tenants, especially those with smaller budgets, per the DBJ. Businesses will need to weigh the cost-benefit tradeoff of moving into new spaces versus staying in their existing locations under much higher rent terms.
Looking ahead to 2025, industrial real estate will be a sector characterized by complexity and flux.
Companies will have to navigate rising rents, shifting supply chain dynamics, and the pressure of lease expirations. Those who can strategically manage their real estate portfolios and anticipate market trends may mitigate some of these risks, while others could face substantial cost increases, per the DBJ. In any case, the industrial real estate market promises to be a focal point for many businesses as they look to secure long-term operational stability amidst ongoing challenges.