Vacancy Stabilization and Slowing Construction to Redefine Industrial Sector in 2025 

Key Takeaways:

• National industrial in-place rents averaged $8.30 per square foot in December, up 6.6% over the past 12 months 
• The spread between the average in-place rents and the rates for leases signed over the past year was $2.04 per square foot in December, a significant decrease from $2.50 per square foot just six months ago 
• Industrial construction starts totaled 236 million square feet in 2024, marking a 35% drop from 2023 and over 60% from 2022 
• Most Western markets saw vacancy rates below the national average at the end of 2024, with Orange County as the tightest market nationwide with a 4.2% rate 
• Industrial rents grew the fastest in New Jersey (9.8% year-over-year growth) and Miami (9.6%), while Midwestern markets like Kansas City (2%) and Detroit (2.4%) saw the slowest rent increases 
• Phoenix continued to be the hottest market for industrial development with a 22.4-million-square-foot pipeline, followed by Dallas-Fort Worth (18.9 million), Houston (12.4 million) and Kansas City (11.5 million) 

Trends & Industry News

2025 — A Year of Transition

The industrial supply boom driven by the pandemic is fading away, but its ripple effects continue to reshape the sector. We anticipate that 2025 will be a year of transition for the industrial sector as it adapts to a new status quo.

Developers responded swiftly to a surge in demand early this decade, completing more than 1.1 billion square feet of space between 2022 and 2023 combined. While the 358 million square feet of new supply delivered in 2024 represented a sharp decline from previous years, it still accounted for a higher supply than any year this century before 2020. The development slowdown will continue throughout this year and the next one, as just 236 million square feet of new construction starts were recorded in 2024, and our industrial property outlooks indicate that a significant increase in new construction during 2025 is unlikely.  

As the industrial sector’s overall construction pipeline shrinks, the types of projects being developed are also shifting. A growing portion of the pipeline is made up of manufacturing and data centers, a change from previous years when warehouse and distribution facilities accounted for over 90% of industrial starts. Data centers will remain in high demand as long as tech firms invest heavily in resource-intensive artificial intelligence. Manufacturing has accounted for nearly 150 million square feet of construction starts since 2022. In November, the annualized construction spending on manufacturing facilities was $235 billion, a figure that has tripled since 2021, according to the U.S. Census Bureau. We expect this trend to continue in 2025, though cuts to the incentives for clean energy production could cause disruptions to the sector.

While we are all closely monitoring potential disruptors, the market’s reasonable absorption of space from the COVID-fueled distribution boom has set the stage for the future of development needs, with an emphasis on manufacturing and data centers

Peter Kolaczynski, Director, CommercialEdge 

Industrial space — scarcely available during 2021 and 2022 — is now much more accessible for occupiers. The national industrial vacancy rate in December was 8%, a significant surge from two years prior when the rate hovered below 4%. The contrast is even more stark in port markets like the Inland Empire, which had a sub-2% vacancy rate in 2022 but a 7.8% vacancy rate in December 2024. According to industrial property outlooks, industrial vacancy rates are expected to plateau in early 2025 before beginning to slowly tick down sometime in the second half of the year as supply is absorbed and new deliveries dry up. 

While fundamentals remain solid, 2025 will not be without headwinds for industrial. The threat
of tariffs from the new administration hangs over the stability of supply chains and port markets,
immigration policy could upend labor markets, and local restrictions on industrial development have
started appearing across the country.

Rents and Occupancy

New Lease Premiums Slow

National in-place rents for industrial space averaged $8.30 per square foot in December, an increase of three cents from November and up 6.6% year-over-year. Port markets continue to see some of the highest growth for in-place rents, but they no longer outpace the pack in a significant manner. New Jersey posted the highest year-over-year growth nationwide, with in-place rents increasing by 9.8%, followed by Miami (9.6%), the Inland Empire and Atlanta (both 8.7%).  

Midwestern markets saw the lowest rent growth, with in-place rents increasing by just 2% year-over-year in Kansas City, 2.3% in Detroit, and 2.4% in St. Louis.  

The national industrial vacancy rate was 8% in December, an increase of 50 basis points from the previous month, as highlighted in our U.S. industrial market report. 

Average Rent by Metro 

The spread between the market average of in-place rents and the average rate for leases signed in the last 12 months stood at $2.04 per square foot in December. This gap has been shrinking in recent months, another indicator of stabilizing demand for industrial space. Just six months ago, the nationwide premium paid for a new lease averaged $2.50 per square foot compared to in-place leases. Since June, the spread between new leases and average in-place rents has decreased in 22 of the top 30 markets.  

The largest spreads between new leases and the market average were registered in Miami ($4.87 more per square foot for a new lease), New Jersey ($4.08), Phoenix ($3.98) and Charlotte ($3.90). New Jersey was the only market to see a significant acceleration in the spread between new leases and market average rents, with the difference increasing by $1.10 per square foot over the past six months. 

Supply

New Starts to Continue Slowing in 2025

Across the U.S., 349.6 million square feet of industrial space was under construction as of December, representing 1.7% of stock, according to our U.S. industrial market report. New construction starts totaled just 236 million square feet in 2024, a 35% drop from 2023 and more than 60% down from 2022. Slowing demand for space paired with higher borrowing costs for construction loans, have cooled development activity, and we do not anticipate any significant increases in starts during 2025.

Though borrowing costs have slightly come down in recent quarters, inflation remaining stubbornly above the Fed’s target rate will likely lead to fewer benchmark rate cuts than previously anticipated. Higher construction loan costs, combined with the ongoing absorption of the new supply delivered in recent years, will temper developer enthusiasm for new projects, at least for now. 

National Industrial Supply Pipeline Trend (Million Sq. Ft.) 

Kansas City has consistently had one of the largest pipelines in recent years, in part thanks to its central location driving logistics activity, but also due to being an emerging manufacturing hub. Panasonic’s 4.7 million-square-foot, $4-billion electric vehicle battery plant in De Soto accounts for more than 40% of the market’s pipeline and is on track to begin battery production this year. 

Western Markets

Phoenix Continued to Lead the U.S. in Industrial Development Throughout 2024

Industrial vacancy rates in Western U.S. revealed contrasting trends in December 2024. Most Western markets recorded vacancy rates below the national average of 8%, reflecting strong demand for industrial space in the region. Orange County posted the lowest vacancy rate across leading U.S. markets, with only 4.2% of its space available for lease at the end of 2024. Portland also ranked as the sixth tightest market in the nation, with a 6% vacancy rate as of December.   

However, other Western markets, — such as Phoenix and the Bay Area — saw notable vacancy spikes throughout 2024. Phoenix's rate has surged by 500 basis points year-over-year to 8.4%, likely due to the excess supply defining the market, while the Bay Area's rate reached 7.8%, marking a 360-basis-point increase over the same period.   

The West ended 2024 holding on to its title as the most expensive region for industrial space in the U.S., with all markets but the Central Valley exceeding the national in-place rent average of $8.30 per square foot. Orange County continued to be the most expensive market in the nation, with in-place rents at $16.20 per square foot, followed by Los Angeles with $14.95 per square foot. However, rent growth in Southern California slowed down throughout 2024. While Los Angeles and Orange County started the year in the top three nationally in terms of rent growth, by the end of December, the markets dropped to the sixth and seventh position, with rent growth at 8% and 7.9%, respectively.  

West Regional Highlights

Phoenix and the Inland Empire saw the widest lease spreads in the region, at $3.98 and $3.01 per square foot, respectively. Meanwhile, the Bay Area and Denver posted some of the lowest lease spreads nationally, at $0.24 and $0.92 per square foot, reflecting narrower pricing gaps between in-place leases and those signed in the past 12 months.  

At the end of 2024, Phoenix continued to lead the nation in industrial development, maintaining its position as the most active construction market since the end of 2023. However, its pipeline shrank significantly year-over-year, decreasing from 42.5 million square feet to 22.4 million. Despite the drop, Phoenix also continues to lead the nation on a percentage-of-stock basis, with current projects accounting for 5.3% of its total stock.  

The Inland Empire followed as the second most active market in the West, with 9.1 million square feet under construction—less than half its 19.4 million-square-foot pipeline a year ago. Meanwhile, Orange County had the smallest pipeline in the region and the second-smallest nationally, with just 1.5 million square feet underway. 

Midwestern Markets

Vacancy Spikes Among Midwestern Markets

Midwestern industrial markets maintained a steady pace in 2024, continuing trends observed in the previous year, with none recording in-place rents above the national average. Minneapolis-St. Paul and Detroit remained the most expensive markets in the region, with in-place rents at $7.16 per square foot and $7.14 per square foot, respectively. However, Detroit saw its rental rates increase by just 2.3% year-over-year, one of the smallest growths nationwide.  

Kansas City has emerged as one of the nation’s key industrial hubs in recent years and began 2024 with the highest industrial occupancy rate in the U.S. and one of the largest development pipelines. While most industrial markets saw their pipelines shrink throughout 2024, Kansas City maintained a steady pace, leading the region in industrial construction and ranking fourth nationally with 11.5 million square feet underway as of December. However, its vacancy rate nearly doubled throughout the year, rising from 2.7% to 4.9%.

Even with this increase, Kansas City remained the third-tightest industrial market nationally, trailing only Bridgeport (4.7%) and Orange County (4.2%). Regarding rent growth, the market recorded the slowest rent increase among the 30 markets tracked in our U.S. industrial market report, with in-place rents rising by only 2% year-over-year to $5.07 per square foot. 

Midwest Regional Highlights

Like Kansas City, Columbus also experienced a spike in vacancy rate throughout 2024, surging by 570 basis points over the past 12 months to 8.7%, above the national average. Despite this, Columbus posted the strongest rent growth in the region, with in-place rents rising by 6.7% year-over-year. New leases inked in the market over the past year cost $2.15 more per square foot, the widest lease spread among Midwestern markets.

After being the top regional market for industrial development 12 months ago and among the top five nationwide, Chicago’s pipeline has decreased by 5.6 million square feet year-over-year to 7.6 million. Its vacancy rate also climbed by 570 basis points to 9.7%, the fifth-highest rate across top U.S. markets. This is mainly due to the excess supply after the record-breaking development activity between 2021 and 2022 that outpaced tenant demand. 

Southern Markets

Dallas-Fort Worth Posts the Highest Vacancy Rate in the Region

At the end of 2024, Dallas-Fort Worth, Baltimore and Memphis had some of the highest industrial vacancy rates in the South, all exceeding the national average of 8%. Dallas-Fort Worth experienced a significant year-over-year growth in vacancy of 470 basis points, reaching 9% at the end of 2024, while Nashville saw a similar increase of 450 basis points to a 7.6% vacancy rate.  

In contrast, Charlotte recorded the region’s lowest vacancy rate at 6.6%, underscoring its robust industrial demand relative to other Southern markets. According to CBRE, Charlotte’s rising demand for the industrial sector is due to a large number of Millennials moving into the area, driving higher consumption and fueling some of Charlotte’s core industries, like manufacturing.      

South Regional Highlights 

Miami ranked as the fourth-most expensive industrial market in the nation, with in-place rents at $12.28 per square foot. This marks a 9.6% year-over-year rent growth, the second-highest among leading U.S. markets, after New Jersey. All other Southern markets had lease rates below the national average of $8.30 per square foot. Miami also posted the widest lease spread in the U.S. at $4.87 per square foot, reflecting notable increases in rates for newly signed leases. In contrast, rates for new leases over the past year in Houston posted a minor decrease of $0.02 per square foot despite the market’s vacancy rate falling below the national average.   

The South remained a key region for industrial development at the end of 2024, with several markets ranking among the most active in the nation. Dallas-Fort Worth led the region with 18.9 million square feet under construction, though this marked a sharp decline from the 33.6 million square feet registered a year ago. In contrast, Houston maintained steady construction activity, with its pipeline remaining flat year-over-year at around 12.4 million square feet. Meanwhile, Memphis led the region in industrial development on a percentage-of-stock basis, with current projects totaling 10.5 million square feet, equal to 3.5% of its existing stock. 

Northeastern Markets

Some of the Most Expensive Markets Located in the Northeast

Northeastern industrial hubs remained among the nation’s most resilient, experiencing steady rent growth throughout 2024. New Jersey led the U.S. in rent growth as of December, with in-place rates rising by 9.8% year-over-year to $11.35 per square foot. The market also ranked second nationally in lease spreads, after Miami, with leases signed here over the past year costing $4.08 more per square foot.  

Conversely, Bridgeport stood out as the only Northeastern market where new leases inked in 2024 were less expensive than in-place rents, with a $0.80 per square foot decline. The market also recorded the region’s slowest rent growth at 5.9% year-over-year but remained among the top 10 most expensive U.S. industrial markets, alongside New Jersey and Boston. Bridgeport was also the second-tightest market nationally, with a 4.7% vacancy rate. In contrast, New Jersey’s vacancy rate surged 400 basis points year-over-year to 8.8%, exceeding the national average. 

Northeast Regional Highlights

While continuing to post asking rents below the national average, at $8.14 per square foot, Philadelphia saw solid rent growth of 7% year-over-year. The market recorded a lease premium of $2.61 per square foot, outpacing Boston’s $2.04 per square foot. What’s more, Philadelphia remained one of the most active markets in industrial development nationwide, ranking fifth with 11 million square feet under construction, up from 9.2 million square feet a year ago.  

In contrast, industrial development slowed across the rest of the Northeast. New Jersey’s pipeline shrank by 2.5 million square feet to 5.5 million, representing 0.9% of its existing stock. Boston had just 1.9 million square feet underway by year-end, one of the smallest pipelines among leading U.S. markets. Meanwhile, no new starts in the Bridgeport area caused its pipeline to decrease from 3.5 million square feet to just 160,000 square feet—the smallest among the country’s top industrial hubs. 

Economic Indicators

Producer Prices Ticking Back Up 

The Producer Price Index (PPI), which measures the prices producers pay for goods and services, saw its biggest yearly increase since February of 2023 in December 2024. The PPI grew 3.3% year-over-year and 0.3% in the month. The goods portion of the index increased 0.6% month-over-month and 1.8% year-over-year, while services remained flat for the month but up 4% over the past 12 months.  

Producer Price Index

The PPI averaged a yearly increase of 1.3% between the second quarter of 2023 and the first quarter of 2024. However, the index grew at an annual average rate of 2.6% in the last three quarters of the year. While these are minor increases compared to the growth the index experienced in 2021 and 2022, it remains a concerning development. Higher prices on the supply side of the economy can be a leading indicator of increases in the consumer index. Inflation remaining above target will lead The Fed to enact fewer rate cuts this year, and higher borrowing costs will impact construction activity, leading to occupiers holding back on expansions and new leases. 

Download the report

Download the complete January 2025 report for a full picture of how U.S. industrial markets evolved in December, including insights on industry indicators and economic recovery fundamentals.

You can also see our previous industrial reports.

Methodology

The monthly CommercialEdge national industrial real estate report considers data recorded throughout the course of 12 months and tracks top U.S. industrial markets with a focus on average rents; vacancies (including subleases but excluding owner-occupied properties); deals closed; pipeline yield; forecasts; and the economic indicators most relevant to the performance of the industrial sector.

Get access to over 13M commercial property records with regularly verified commercial data, including local market insights, recent transactions and loan details with CommercialEdge Research.   

CommercialEdge collects listing rate and occupancy data using proprietary methods.

• Average Rents —Provided by Yardi Market Expert, a cutting-edge service that uses anonymized and aggregated data from other Yardi platforms to provide the most accurate rental and expense information available.
• Vacancy — The total square feet vacant in a market, including subleases, divided by the total square feet of industrial space in that market. Owner-occupied buildings are not included in vacancy calculations.

Stage of the supply pipeline:

• Planned — Buildings that are currently in the process of acquiring zoning approval and permits but have not yet begun construction.
• Under Construction — Buildings for which construction and excavation has begun.

Market boundaries in the CommercialEdge industrial report coincide with the ones defined by the CommercialEdge Markets Map and may differ from regional boundaries defined by other sources.   

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