Over a year on from “Liberation Day,” trading partners and trade routes have changed, propelled by a shift by firms toward importing from countries with more favorable tariff terms. While the effects have not been immediate on industrial commercial real estate, they are starting to cycle through, proving to be a major impediment to the property type reaching a stable growth path. Rather, performance metrics for the sector have decelerated significantly, although the blame cannot be placed squarely on trade policy alone. The unfortunate timing of trade policy uncertainty since the start of 2025 has coincided with a slowing sector where demand growth began a period of natural normalization following exuberant expansion within the sector, both in terms of vigorous supply growth and enthusiastic space uptake in the early 2020s. Previously sustained by strong e-commerce growth and investments in domestic manufacturing, industrial performance is now strained as these drivers have slowed significantly amid concerns over macroeconomic uncertainty, including employment and trade policy.
Languid demand growth related to consumer spending on goods stemming from job market uncertainty and headwinds related to broader trade policy have finally caught up to the property type across subsectors. Effective rents slid in the first quarter of this year, albeit negligibly. This is notable because it is the first quarter since the third quarter of 2011 that rents have declined over a nearly 15-year span.
Omnichannel spending, which links brick-and-mortar retail with distribution and warehousing industrial, is sputtering as the growth rate of the e-commerce share of total retail sales plateaus. The figure reached 16.4 percent at the end of 2025, only up from 16.1 percent at the end of 2024. Thus, languid growth for this figure is proving a tailwind for retail as consumers continue to spend in-store. For context, the figure during the first quarter of 2020 stood at 11.9 percent, the highest reading until that point. While the level is robust, headwinds persist. The growth rate of the e-commerce share of retail sales has decelerated abruptly, with only a three-tenths percentage-point increase year over year between 2024 and 2025. Stagnation in e-commerce retail growth, a major tailwind for industrial property demand, spells performance inertia for warehouse/distribution and flex properties reliant on expanding demand for faster and more localized distribution channels.
16.4%
Mild growth in total retail spending is underscored by generally sluggish consumer sentiment. The University of Michigan’s Consumer Sentiment Index declined in April, reaching a record low of 49.8, revised upward from the 47.6 preliminary figure for the month. The previous record-low index reading of 50.0 was achieved in June 2022. For historical context, during the depths of the Global Financial Crisis in November 2008, the index only dipped to 55.3. The index has fallen sharply over the past year and a half, down approximately 24 index points since the end of 2024. Over the five-year period from April 2021 to April 2026, the index is down nearly 40 points.
Effective rents slid in the first quarter of this year, marking the first quarterly decline since 2011.
The index has generally trended downward over the past two years, as listless job growth and, more recently, concerns regarding trade policy and rising consumer prices have weighed on it. Additionally, the period of stubbornly high inflation that cut into household discretionary incomes has restrained consumer spending on many nonessential goods, with seemingly no reprieve in sight as monthly inflation measures hover near or above 3 percent amid elevated oil prices. Consumers and businesses alike are facing higher energy prices because of the conflict in the Middle East, both at the pump, which makes consumers think twice before driving to stores to purchase nonessential goods, and because of the pass-through effects that higher oil prices have on goods transportation.
Trade inflows from high-tariff countries have lessened while increasing from countries with more favorable terms, shifting logistics networks.
Trade inflows from high-tariff countries, such as China, have lessened while increasing from countries with more favorable terms, such as Mexico, shifting logistics networks. Thus, performance varies geographically, with port cities on the West Coast weakening as markets along the Northern and Southern borders, with land-route access to Canada and Mexico, exhibit greater resilience. The Northern border exhibits this quite clearly. Milwaukee, whose warehouse/distribution inventory has increased by a notable 3.7 percent from the first quarter of 2025 to the first quarter of 2026, has seen its vacancy rate decline by 100 basis points over the same period. Detroit, a far more mature market relating to goods trade with Canada given it sits right on the border across the river from Windsor, Ontario, experienced outcomes similar in directionality but less extreme in magnitude, with inventory growth of 0.3 percent year over year and a decline of 10 basis points in the vacancy rate. Rochester and Syracuse, meanwhile, although still in upstate New York, do not have proximate land routes for trade, and neither experienced increases in supply during the period and saw vacancy rates rise by 20 and 50 basis points, impacted by broader conditions generating a slowdown in the industrial sector. Buffalo is an anomaly and highlights just how locationally idiosyncratic performance for the warehouse/distribution subsector has become. Though directly on the border with Canada, separated only by the Niagara River, Buffalo experienced no supply growth, and its vacancy rate rose by 10 basis points.
49.8
Concurrently, West Coast markets are facing high vacancy growth, dually plagued by high inventory growth and a reduction in goods imported from key export markets across the Pacific Ocean, such as Orange County and San Bernardino/Riverside. In the San Francisco Bay Area, even without inventory expansion, markets such as Vallejo-Fairfield are experiencing steep increases in vacancy rates. At the Southern border, however, El Paso, along with smaller yet still key warehouse/distribution markets for international trade, including Brownsville, Laredo and McAllen, are experiencing more modest vacancy increases despite outsized inventory growth.
The growth rate of the e-commerce share of retail sales has decelerated abruptly.
Despite the property type’s positive long-term prospects based on the projected growth of demand drivers, in the short run, the sector continues to underperform compared with its expected equilibrium, as softening growth for the e-commerce demand driver is a point to keep under consideration. On the other hand, domestic manufacturing incentives are expected to sustain industrial property activity. The construction pipeline indicates that the number of projects expected to be completed in 2026 is much lower than in previous years, with only approximately 80 million square feet expected to be delivered.
Nonetheless, stabilizing demand indicates that the vacancy rate will drop slightly to 7.8 percent by the end of 2026, while asking and effective rent growth will pick up to about 2 percent for the year. Following previously exponential growth in the early 2020s, performance has cooled over the past two years, with a notable increase in the vacancy rate driven by the volume of new supply at a time when demand deterioration has prevailed, unable to escape the downward pressure all CRE is facing.
