According to CoStar, over the past 12 months, the total amount of industrial space occupied nationally has increased at the slowest pace since 2012.
While expected tax cuts and business regulations could provide a near-term boost to lift industrial tenant demand out of its doldrums, several risk factors could reduce the impact of those policies.
Continued high mortgage rates may continue to constrain U.S. home sales and, by extension, sales of warehoused goods such as furniture, appliances and building materials. The prospect of increased tariffs could also leave many retailers and manufacturers hesitant to expand their U.S. distribution networks.
Regardless of these factors, the ongoing scarcity of smaller industrial space is likely to persist throughout 2025 and beyond.
The vacancy rate of U.S. industrial properties smaller than 50,000 square feet is currently 3.4%, largely because only 23 million square feet of small bay industrial space is currently under construction across the U.S. This represents less than 0.3% of existing industrial properties nationwide, and has been falling since interest rates began moving upward in 2022.
Purchasing and preparing sites for small industrial developments is almost as time-intensive as the process for larger bulk distribution center developments. As a result, those with industrial development expertise often opt to focus on larger projects, viewing them as a more efficient way to deploy capital.
In addition, despite the strong demand for small bay space, many owners find that subdividing large distribution centers to accommodate smaller industrial tenants is not cost-effective or practical and requires more intensive property management services.
Meanwhile, millions of square feet of small, low-rise industrial properties are demolished every year to make way for larger projects, such as residential redevelopments or fitness-related tenants such as cross fit gyms and pickleball operators.
