Warehouse Vacancy Hit 7% But Smart Money Sees the Setup

Min 1: Supply Peak Already Passed While Demand Accelerates

Construction starts hit their eighth consecutive quarter of decline in Q4 2024 according to Newmark's industrial market report. Developer liquidity constraints from higher borrowing costs and reduced bank lending drove the pullback. Ares Management expects new deliveries to fall 50% year-over-year in 2025 and decline another 20% in 2026 given the lack of new projects in the pipeline.

The math creates the opportunity. Current 7.5% vacancy absorbs within 18 months as new supply dries up and e-commerce demand compounds. E-commerce captured 23.2% of total retail sales excluding autos and gasoline in Q3 2024 and CBRE forecasts 25% by year-end 2025. Every percentage point of e-commerce penetration requires an additional 1.2 million square feet of warehouse space nationally to support fulfillment operations.

Operators who acquire industrial assets now at elevated cap rates buy into falling supply and rising demand simultaneously. The setup mirrors 2010 when construction froze post-financial crisis but consumer spending recovery drove vacancy from 8.6% to 4.8% in 36 months.

Min 2: Onshoring Wave Needs One Billion Square Feet

Manufacturing reshoring following pandemic supply chain disruptions and trade tensions creates industrial demand beyond e-commerce. Estimates suggest reshoring could require more than one billion square feet of logistical support over the next decade according to industry analysis compiled by Ares.

Third-party logistics providers already drove this trend. Their share of bulk industrial leasing activity jumped to 34.1% through Q3 2024 from 30.6% the prior year per CBRE data. Companies outsource distribution operations to preserve capital and gain import flexibility during geopolitical uncertainty.

For investors, this translates into tenant quality improvement and rent growth sustainability. Warehouse landlords securing 3PL tenants lock in longer lease terms with better credit profiles than single-user distribution centers. The rent premium for modern warehouse space with automation-ready infrastructure runs 15 to 20% above obsolete buildings, creating forced obsolescence that benefits Class A owners.

Min 3: Modern Warehouses Capture While Obsolete Buildings Bleed

CBRE tracked absorption patterns and found buildings constructed before 2000 recorded more than 100 million square feet of negative absorption in 2024. Meanwhile properties completed after 2022 posted more than 200 million square feet of positive absorption. Flight to quality accelerates as tenants prioritize clear heights above 32 feet, ESFR sprinkler systems, and proximity to population centers.

The value gap compounds quickly. Modern warehouse space trades at $175 to $200 per square foot in primary logistics markets while obsolete buildings sell below $75 per square foot according to recent transaction data. An operator who bought a 200,000 square foot Class A warehouse in Dallas in January 2024 at a 6.2% cap now refinances at 5.8% as market rent growth of 4% annually drives NOI higher.

Compare that to owners of 1980s-era warehouse buildings watching vacancy climb to 15% while facing $25 per square foot in capital expenditures to modernize. The antiquated assets require complete redevelopment or conversion to alternative uses. Class A warehouse owners collect rent while obsolete building owners write checks.

Min 4: Small Operators Exploit Land Bank Advantage

Institutional investors like Blackstone and Prologis hold massive land banks near major transportation corridors. But elevated construction costs and tight lending keep even large players selective about breaking ground. That creates opportunity for smaller operators who can buy entitled land or distressed warehouse conversions below replacement cost.

Speculative development accounted for more than 80% of deliveries through Q3 2023 per Cushman & Wakefield data. That wave ended. Now developers focus only on high-demand locations with minimal competition and pre-leasing commitments. Markets like Houston, Kansas City, Louisville, Nashville, and Raleigh-Durham serve manufacturing in both the U.S. and Mexico but see less institutional competition than Inland Empire or New Jersey.

An operator who secures 20 acres of entitled industrial land in Nashville today pays $15 to $18 per square foot. Build-to-suit development delivers at $90 to $100 per square foot all-in while market sales trade at $140 to $160 per square foot. The manufactured equity provides cushion even if market rents stay flat during lease-up.

Min 5: Automation Requirements Democratize Through Technology

Warehouse automation and robotics once required $50 million capital investments accessible only to Amazon and Walmart. Now autonomous mobile robots, warehouse management software, and AI-powered inventory systems operate at one-tenth that cost. Small warehouse operators deploy automation to compete with institutional platforms on efficiency.

This trend accelerates tenant demand for modern space and obsoletes buildings lacking power infrastructure and clear heights to support robotic systems. Landlords who proactively install adequate electrical capacity and fiber connectivity command rental premiums and retain tenants longer than owners who defer infrastructure upgrades.

The democratization creates scale advantages for nimble operators. A syndicator who acquires three 100,000 square foot warehouses in secondary markets and installs standardized automation packages attracts 3PL tenants seeking geographic diversification away from higher-cost primary markets. The model delivers 18 to 22% IRRs while taking less lease-up risk than ground-up development.

The Takeaway

Industrial real estate vacancy climbed to 7.5% in late 2024 as the largest construction wave in a century hit completion, but the supply peak already passed eight quarters ago. Construction starts collapsed 77% from 2022 levels while e-commerce continues capturing 25% of retail sales and manufacturing reshoring requires one billion square feet of new logistics space over the next decade. Newmark and CBRE data confirm deliveries will fall 50% in 2025 and another 20% in 2026, setting up supply-demand rebalancing that drives vacancy back below 5% by late 2026. Operators who acquire Class A warehouse assets now buy falling supply and rising demand simultaneously, capturing rent growth and cap rate compression as the market reprices scarcity. The window to deploy capital at elevated yields closes as institutional investors recognize the setup and chase returns in 2025, making now the moment to act before competition eliminates the spread.