November 1, 2024
Industrial Smart Growth: The Next Stage of Tactical Network Optimization
- Industrial real estate tenants are employing a new smart-growth strategy for the next phase of leasing, placing greater emphasis on asset selection for warehouse space when considering future expansions.
- Infrastructure requirements for logistics real estate have expanded to include high power availability, automation capabilities, and sustainable building features.
- Supply network diversification, including through nearshoring and onshoring of operations, has become a key driver of location selection for industrial users.
Logistics real estate is entering a new phase of growth after years of volatility, one focused on smart-growth decision-making to optimize supply chains, circumvent disruption, and stand the test of time. During the pandemic, companies aggressively expanded their footprints to meet soaring consumer demand. The past two years have seen a reversal, with leasing activity slowing as the market saw an influx of high-quality supply. In 2025, the new phase will merge elements of both periods: more high-quality options for customers pursuing a strategic, deliberate approach to growth that will shape the future of the supply chain.
In 2023 and 2024, companies delayed decision-making on expansion plans amid high economic uncertainty and cost challenges. As a result, new demand is expected to return in 2025 with the added layer of supply chain optimization guiding growth strategies.
Companies are increasingly involving more stakeholders in their decision-making and reevaluating business models with a closer eye. C-suite executives and supply chain consultants have become more involved with day-today leasing, leading to extended deal-making timelines. According to an industrial real estate leasing expert, activity will be picking up into 2025 but not as sharply as originally expected. Instead, industrial market users will continue to adopt tactical approaches to their supply network reorganization and work toward optimizing costs through the uncertain economic landscape. The result is a deliberate and tactical approach to leasing to best increase revenues, optimize expenditures, and maximize the company’s resources.
In the first half of 2024, the United States recorded around 80 million square feet of net absorption, a 37 percent decline from the same period in 2023. Meanwhile, according to CBRE, leasing activity nationwide—a leading indicator of net absorption—grew 5 percent during the same period. This pickup of deal making is partially a response to rental rate declines in most markets that optimize opportunities for industrial tenants.
The industrial development cycle tells another story, one of a rebalancing to match this new demand trajectory. New construction starts continued to fall in 2024, with speculative development starts decreasing by 43 percent in the first half of the year compared to the same period in 2023. Additionally, a further decline of 20 percent for the entirety of 2025 is projected when compared to the peak ground-breaking volume of 2023. New supply availability is expected to rebalance in 2025 as developers adopt a more disciplined approach to development. When the expected increase in leasing activity comes into play next year, industrial users will have a broad range of high-quality, modern facilities to choose from—mainly in the expanding Sunbelt region—as smart-growth strategies continue to expand.
Supply Chain Diversification to Drive Decision-Making in 2025
As trade relationships continue to evolve globally, expansions of real estate footprints, to mitigate risks and move goods closer to the end consumer, will continue. This trend is apparent in developments of manufacturing facilities in markets like Mexico and India to reduce reliance on a single point of origin for inventory. In 2023, Mexico saw a 27 percent increase in foreign direct investment, and demand in Mexican border markets remains approximately double prepandemic levels. This rapid acceleration is driven by continued nearshoring and onshoring manufacturing growth. In 2025, efforts to optimize supply chains will emphasize increased diversification. Chinese manufacturers continue to move operations into Mexico as border markets in both the United States and Mexico have seen a surge in demand. However, the pace of onshoring back to the United States has been slower than anticipated, as challenges related to land availability and operational cost challenges have risen in the United States.
Access to Quality Long-term Infrastructure to Drive Leasing Behavior in Next Phase
Industrial tenants are not only looking for high-quality modern assets to meet their supply chain needs. As they grapple with heightened capital constraints, they are also focusing on optimizing operating margins, capital outlay, and resource needs. Access to power and water has emerged as a key consideration in leasing needs as occupiers employ more energy-intensive features, including automation, electric vehicle capabilities, and industry-based needs for advanced manufacturing facilities and data centers. An expert in industrial customer preferences noted that power availability is the second-most crucial element in leasing decisions, right after location. In some places, such as California, Phoenix, and Nevada, power is already a barrier to move-ins as users grapple with long wait times with utilities and a lack of adequate power to conduct operations. As temperatures rise in high-demand markets in the southern United States, high power temperature control and technologically advanced facilities continue to increase the power needed to fuel modern logistics facilities. Battery and solar capabilities have continued to gain traction in key logistics markets that experience brownouts on a more frequent basis.
Luckily for most tenants, the massive influx of supply over the past year means that those looking for modern building features have more high-quality options. The demand has largely moved from built-to-suit properties to existing inventories due to the ready availability of speculative products, though certain tenants with distinct power requirements and specific supply chain needs continue to prioritize custom buildouts. Built-to-suit absorption is forecast to fall 50 percent in the first half of 2025 as existing high-quality inventory will satisfy current demand.
A Major Differentiator for Industrial Users: Technology
Industrial owners, investors, and operators investing in technology and automation are at the forefront of using modern technology to improve the efficiency and performance of supply chain operations. Conventional AI is extensively employed across different sectors, especially for customer support automation. For internal warehouse operations, adopters focus on optimizing pick stations and throughput rates, capitalizing on existing labor, and helping increase efficient operations. An industrial real estate specialist indicated that the staffing needs for warehouses have surged significantly in the past decade, especially within e-commerce operations. Companies are now adopting quick-fix solutions—such as automated warehouse robots to transport goods throughout the facility—which have proven highly beneficial for both e-commerce activities and extensive warehouse spaces.
Supply chain visualization technology has also continued to gain traction, with companies turning predictive models into practical solutions for inventory management and accuracy. This strategy has helped companies better understand where inventory is headed, where it comes from, and how best to utilize their network. Supply chain analysts are constantly monitoring these predictive models relying on this high-quality data. As companies make greater use of these technologies, data integrity is the most crucial factor in accurate modeling and the decision-making associated with those predictions. Optimized warehouse and network design have become crucial, especially for larger, well-funded companies. These businesses now need advanced solutions to manage extensive inventories and complex supply chains and to optimize their financial overheads.
Importance of Sustainability to Future Supply Chain and
Long-Term Strategy
Industrial users are currently developing sustainability measures with a long-term perspective, assessing strategies that will unfold over several decades. Environmental initiatives, including net zero goals and regulatory measures from local and state governments have continued to drive the timeline on adoption of sustainability goals. An estimated 40 percent of industrial users have adopted net zero goals as of 2024, compared to less than 10 percent in 2019. Companies are recognizing that with a 10-to-15-year industrial lease, environmental policies need to be implemented soon to meet these sustainability goals. Not all industrial users are able to adopt these measures in the current market environment; but the value of long-term investments—for example, in environmental, social, and governance (ESG) initiatives—is quickly outweighing the short-term cash-flow challenges.
Industrial Investment Improving alongside Pricing Clarity
Deal volumes have stabilized in the industrial sector, albeit with fluctuations, as investors come to terms with the new cost of capital. According to a capital market expert, the number of industrial deals has remained relatively stable, showing improvement when compared to the decline observed in the previous year. In second quarter 2024, highvalue areas with recently sluggish demand (such as Los Angeles) experienced the greatest percentage declines in transaction volumes. In contrast, areas with strong market dynamics (like Dallas) witnessed the strongest increases in transaction volumes.
Transaction volumes have remained consistent with pre-pandemic levels, indicating that a new normal has been established within the sector. Cross-border investors remain active, favoring portfolio and entity deals. Investors continue to view industrial real estate as a stable long-term asset class due to stronger prospects of income growth compared with other real estate asset types, higher operating margins, and low capital expenditure requirements.
Conclusion
As logistics real estate operators grapple with economic uncertainty, rising interest rates, and shifting global trade dynamics, smart-growth strategies are the story of the next phase of the industrial real estate cycle. This next stage will be shaped by the future of supply chains, with a focus on strategic growth, technological advancements, and sustainability initiatives.