A glut of mid-sized warehouse space is emerging as a defining pressure point in today's industrial market, even as overall fundamentals remain relatively stable and demand holds up at the smaller and larger ends of the spectrum.
That imbalance traces back to the pandemic-era building boom, when developers heavily concentrated on properties between 100,000 and 500,000 square feet—now the segment facing the most persistent supply overhang.
"During the pandemic, there was a lot of leasing activity," Juan Arias, CoStar Group's national director of industrial analytics, tells GlobeSt.com. "Tenants were leasing wherever they could find space." In response, developers ramped up speculative construction, with much of it pre-leased before delivery, pushing supply to roughly double normal levels in 2022 and 2023.
Today, that wave of new product is still working through the system—especially in mid-sized buildings. "It's supposed to begin to wane by the end of this year, early next year," Arias says. "Speculative pre-leasing rates have dropped significantly. In some of the bigger markets like Lehigh Valley or the Inland Empire, there's an overhang of supply."
By contrast, leasing activity has held up better in small-bay properties and in facilities exceeding 500,000 square feet, creating a bifurcated market. Smaller spaces are benefiting as tenants prioritize efficiency amid rising operating expenses, while larger users are capitalizing on increased availability at the top end.
"The consumers are being more careful about goods purchases," says Arias. "It doesn't seem like the retailers are holding on to excess inventory anymore. I track the weight of containerized imports. That reading still remains below the pandemic highs of 2022."
At the high end, "bigger owners and bigger tenants are taking advantage of the fact that there's some availability of big boxes," Arias says, noting that many are choosing to buy rather than lease to avoid future rent volatility in a market where pricing has flattened.
Despite the mid-size drag, the broader market is not showing signs of distress. "We've softened a little bit more than expected, but it's still not terrible rates of 8% or 9%, which is what you'd expect if you were about to hit a recession," he says. "It also depends on the property segment."
Vacancy rates are expected to remain fairly stable through the rest of the year before beginning a "long, slow descent" starting in 2027, as new construction slows and demand gradually catches up. Vacancies are projected to stay above 7% through 2027 and into 2028, still elevated compared to the sub-4% levels seen during the pandemic peak.
"The expectation is that by 2027, the fact that construction starts have started to moderate back to pre-pandemic levels, supply additions will be more moderate, and demand will outpace supply by the end of the year," Arias says. Historically, a balanced industrial market has vacancy rates between 5% and 6%, suggesting the sector is moving toward equilibrium—though the mid-size segment is likely to lag behind.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.