by: Tiara D’Mello

Limited Supply and Past Trends

A recent decline in construction starts could result in increased asking rents for industrial properties in 2025. Throughout 2024, industrial construction starts experienced a 33.5% decline, mirroring broader trends. In 2023, new starts fell by 40%, reflecting tightened loan conditions, rising costs, and economic uncertainty (Lung). Nationally, in-place rents increased by 7.5%, indicating supply constraints are already influencing prices. These trends highlight how reduced construction activity has consistently driven up rents by limiting the availability of new industrial spaces (CommercialEdge).

Rising rents in the industrial property sector offer exciting opportunities for both existing and new owners. However, securing capital for these projects can be challenging as we enter 2025. Lever Capital Partners, experts in the industrial real estate market, are here to help. We specialize in crafting tailored strategies to secure the most competitive financing solutions, whether you’re developing new projects, acquiring properties, or optimizing your investment portfolio for sustained success.

Future Trends and Demand-Supply Gap

Looking ahead, demand for industrial spaces remains robust due to e-commerce growth, nearshoring, and shifting supply chain strategies. However, the slowdown in new projects will likely continue to widen the gap between demand and available supply. Industrial facilities, particularly in key logistics hubs like Los Angeles and the Inland Empire, continue to report rising rents as vacancy rates tighten. For example, rents in the Inland Empire increased by 12.5% in 2024, demonstrating the price pressures created by sustained demand coupled with limited new construction (CommercialEdge).

This persistent demand is driven by several factors. The e-commerce sector’s expansion has increased the need for strategically located warehouses and distribution centers. Similarly, nearshoring—the practice of relocating production facilities closer to domestic markets—has spurred demand for industrial properties in North America. Additionally, evolving supply chain strategies emphasize the importance of proximity to major markets and transportation networks, further increasing demand for logistics hubs. These factors, combined with limited new construction, are expected to exacerbate the demand-supply gap, keeping pressure on asking rents.

Regional Variations

The impact of the construction slowdown varies by region, with high-demand areas like Southern California, Dallas-Fort Worth, and Chicago feeling the effects more acutely. Southern California, particularly Los Angeles and the Inland Empire, has consistently seen some of the highest rent increases due to its critical role in global trade and logistics. In these regions, vacancy rates have fallen below 2%, leaving tenants with few options and driving up competition for available spaces. Meanwhile, markets like Dallas-Fort Worth and Chicago, which serve as major inland logistics hubs, are also experiencing rising rents and tightening vacancies. However, regions with more available land or slower demand growth may not experience the same level of price increases, highlighting the localized nature of these trends.

Rising Costs and Inflation’s Impact

While construction slowdowns create supply challenges, rising costs and inflation also impact landlords. Higher expenses for maintenance and financing push property owners to increase rents to maintain profitability. Yet, it’s important to connect these costs directly to construction trends. Developers are pausing projects partly because high interest rates and economic uncertainty have made financing less viable. These factors intertwine, with slower construction reducing new supply and compounding the effects of inflation on rent increases (Coldwell Banker).

In addition, inflation has driven up the costs of raw materials and labor, making new developments more expensive. This has led many developers to delay or cancel projects, further straining the supply pipeline. For existing property owners, these rising costs create additional pressures to increase rents, as they seek to offset higher operational and financing expenses. The interplay between construction slowdowns and inflation highlights the broader economic dynamics at play in the industrial real estate market.

Strategic Implications for Tenants and Investors

The current trends in industrial real estate have significant implications for both tenants and investors. For tenants, rising rents and limited availability mean they must act strategically when securing space. Long-term leases and early renewals can help mitigate exposure to escalating costs. For investors, the supply constraints and rising rents present opportunities for strong returns, particularly in high-demand markets. However, navigating the challenges of financing and rising construction costs requires careful planning and market analysis.