The industrial real estate sector, once hailed as a pandemic-era darling alongside multifamily properties, is now facing a reality check. The myth of its invincibility is beginning to crack, revealing a new and growing divide within the market. According to CBRE, this bifurcation is expected to intensify over the next five years, resulting in a “distinct performance gap” between the top and bottom tiers of industrial properties.
Unlike the office sector, where the split between Class A and Trophy properties versus Class B and C has been largely determined by age and condition, the industrial divide is being shaped by geography. CBRE noted that the primary driver of this gap will be rent growth variations across different markets. While the physical quality of properties still matters, location is emerging as the dominant factor.
Some of the nation’s largest regional and national distribution hubs, such as Riverside, California, are already experiencing declining rents—a stark contrast to the “significant growth” seen immediately after the initial shock of Covid-19, according to CBRE. These major hubs, which serve complex supply chains and attract the attention of leading developers, are also “highly sensitive” to broader macroeconomic shifts.
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One such shift has been a slowdown in the relentless demand for more warehouse space that characterized the immediate post-pandemic period. As investors sought alternatives to expensive equities and low-yield bonds, commercial real estate—and industrial properties in particular—became a favored destination. Developers responded in kind, sparking a construction boom that ultimately led to an oversupply in many of the largest distribution markets.
This glut of new properties is now acting as a ceiling on rent growth, CBRE explained. In an ironic twist, the best-known industrial markets—the very ones that once led the charge—are now expected to lag behind in future rent increases.
Instead, the strongest opportunities are emerging in smaller, less volatile markets like Louisville, where supply and demand have remained more balanced. These markets are less exposed to the whims of the broader economy and, according to CBRE, are poised to outperform over the next five years.
Among the markets with the highest projected rent growth are Charlotte, North Carolina, Omaha, Nebraska. Their more measured pace of development has left them better positioned to weather both overbuilding and shifts in consumer spending.
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