A wave of record industrial development met a period of weakened demand, causing an oversupply of space and low rent growth, according to Lee & Associates’s latest market report. The commercial real estate services’ firm saw the retail sector hampered by approximately 8,700 bankruptcies, causing the largest tenant contraction in North America since 2020.
“The large-bay regional logistics development greatly accelerated in 2018-19 and continued through 2023. Recent deliveries have outpaced demand,” says Lee & Associates’ CEO, Jeff Rinkov. “This is creating a gap in absorption and vacancy rates.” Meanwhile, Rinkov notes that retail vacancies remain at or near record lows.
Industrial at a Crossroads as It Waits Out Tariffs’ Effect
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Slowing industrial demand saw US net absorption in the first quarter totaling just 9.5 million square feet, and combined with 129.4 million square feet in 2024, pointed to the least growth since the Great Recession in 2010. Year-over-year rent growth decelerated significantly over the past year to 2.1%, less than half the five-year average before Covid.
Rinkov says that he and other experts are closely watching the escalating trade war developing between the US and a host of countries, as tit-for-tat tariffs influence industrial site selection and leasing activity.
“We are absolutely seeing definite changes and the industrial community is trying to absorb these changes,” says Rinkov. “It’s creating substantial uncertainty and affecting significant capital investments and long-term commitments, which creates a negative effect on landlords and tenants.”
Rinkov hopes that the Administration will define its goals and objectives in the near-term, paving the way for the industrial industry to chart a path to success. Additionally, he says several Sunbelt markets—including Austin, Texas and Phoenix—are currently overexposed with development far outpacing demand, but notes that will likely normalize when trade policies are determined.
“The shift in trade policy appears to be impacting commitments for the new stock of industrial inventory. We are expecting a return to historically strong absorption once trade agreements and policy are implemented,” says Rinkov. “However, we are in a period where there’s a slowness in capital commitment that might impact development in the next 12 to 18 months.”
Retail Space Weakens Throughout North America
On the retail side, bankruptcies shuttered more than seven million square feet in the first quarter, which, following the net absorption of 23.1 million square feet in 2024, marks one of the weakest annual totals in a decade.
Overall, Rinkov says that store closures and bankruptcies reflect a transitioning retail environment.The lack of retail development represents the changes to the tenant base and high development costs. “There’s still some concern about where that transition lands and what the post-weakness legacy tenant base looks like.We are experiencing strong demand from certain retail segments.”
Rinkov sees experiential, discount and value-focused retailers as growth spots. Predominantly led by national tenants, value-oriented tenants are leading the upward trend in absorption for retail.
And yet, despite the sharp upturn in retailer bankruptcies and store closures, availability across US retail space markets remains within 10 basis points of the historic low of 4.8% as new development is constrained.
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