The industrial market remains caught between a historic supply overhang that is pushing vacancy rates higher and emerging demand trends suggesting conditions may be beginning to stabilize, according to John Chang, chief intelligence and analytics officer at Marcus & Millichap.
National industrial vacancy is expected to rise from 7.8% in the first quarter to 8.4% by year-end as the market continues to absorb the impact of an unprecedented construction boom. Between 2020 and 2024, developers delivered 2.1 billion square feet of industrial space, expanding inventory by nearly 13%. Another 200 million square feet is expected to come online in 2026.
Yet a closer look at the data reveals a market that is performing differently across property types and sizes. Smaller infill warehouses continue to outperform larger facilities. Properties between 10,000 and 50,000 square feet are maintaining a vacancy rate of just 4.5%, reflecting steady demand for last-mile distribution and local logistics space. By comparison, facilities ranging from 200,000 to 750,000 square feet are carrying an 11.1% vacancy rate.
At the same time, some of the largest distribution centers are beginning to regain momentum. Vacancy among facilities exceeding 750,000 square feet has declined from a peak of 9.2% in the third quarter of 2025 to 7.6% in the first quarter of this year. Newer buildings are also showing signs of improvement, with vacancy rates for properties delivered since 2020 falling 470 basis points from their 2024 peak, according to Chang.
The improving performance comes as construction activity slows sharply. New industrial development is projected to fall 64% from its 2023 peak, reducing future supply pressure and improving the sector's long-term balance.
Demand is also being supported by consumer spending and e-commerce growth. Inflation-adjusted retail sales remain positive, rising 0.5% year-over-year. Meanwhile, e-commerce continues to gain market share, accounting for 23.2% of core retail sales in March. Inflation-adjusted online sales increased 7.2% year-over-year to $128.4 billion.
Near-term risks remain, however. Rising transportation and energy costs are creating new pressure across supply chains. Shipping costs from Asia to the U.S. East Coast have climbed 41% since the outbreak of conflict in the Middle East, while West Coast shipping rates have increased 53%. Flatbed trucking costs are up 33% and retailer inventories have declined 1.9% over the past year.
Despite those headwinds, investors appear focused on the sector's longer-term fundamentals. Industrial transaction activity remains near record levels, and cap rates have edged lower over the past year. While elevated vacancies may persist in the near term, slowing construction and continued e-commerce expansion are providing reasons to believe the sector's next phase of growth is beginning to take shape, Chang said.
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