Demand for industrial space is expected to cool following a period of rapid expansion. The market for industrial real estate faces headwinds from a large volume of project completions and a slowing economy, but this trend reflects more of a return to normal than a negative outlook for the sector, according to the just-released NAIOP Industrial Space Demand Forecast.

“Quarterly net absorption of industrial space will average 14.0 million square feet per quarter over the next two years, or 62.8 and 49.1 million square feet in 2024 and 2025, respectively,” according to the report, which was written by Hany Guirguis, Ph.D., Manhattan College, and Joshua Harris, Ph.D., CRE, Fordham University.

The forecast notes that the pandemic “accelerated the need for distribution space to meet consumers’ increased preference for home delivery.” A large volume of industrial space that was built to meet that demand is now coming online at the same time that demand itself has slowed as consumers shift spending back to services and in-store shopping. This short-term imbalance of supply and demand is contributing to an increase in the availability of industrial space, which “ended 2023 at 7.1%, significantly above the post-pandemic low of 4.6% seen in the second quarter of 2022, but right in line with the lows experienced from 2015 through 2020.”

The authors expect that a “soft landing” (or slowdown) for the economy in 2024 will keep a lid on growth in demand for industrial space, but that a reacceleration of the economy in 2025 could be accompanied by an increase in industrial absorption. At the same time, high interest rates are discouraging new industrial construction, which should slow the delivery of new space and bring supply and demand back into balance.

“The pandemic drove trends that dictated a need for more warehouse and distribution space,” said NAIOP president and CEO Marc Selvitelli, CAE. “The sector had been remarkably hot as a result; what we are seeing in this forecast is in line with what we would have expected without the once-in-a-lifetime disruptor.”

The forecast is funded by the NAIOP Research Foundation and uses a model developed by Guirguis and Randy Anderson, Ph.D., formerly of the University of Central Florida. The model forecasts demand for industrial space at the national level by utilizing variables that comprise the entire supply chain and lead the demand for space thereby capturing most changes in demand.

Download the full NAIOP Industrial Space Demand Forecast.