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The case for industrial development in the next cycle

September 25, 2025
Art Jones
Senior Director, Global Real Estate Research and Strategy
Rich Hill
Global Head of Real Estate Research & Strategy
Daniel Tomaselli
Manager, Global Research
JD Stehwien
Senior Analyst, Global Research
Thomas McGing
Analyst, Global Research
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AT-A-GLANCE

The U.S. industrial sector has moved beyond its 2022–23 correction and is showing early signs of recovery. Values declined less than other property sectors during the downturn, and operational metrics—particularly net operating income growth—remained resilient. However, success in the next phase of the cycle will depend on selectivity in market, asset quality, and timing:

  1. Fundamentals: Resilient but diverging
    • NOI growth: Is in the mid-6% average, driven by 40% lease mark-to-market gains over the last five years.
    • Pipeline reset: Projects under construction are down nearly 70% from their 2023 peak, normalizing supply.
    • Winners vs. losers: Modern logistics facilities continue to attract demand; older assets are facing occupancy losses.
  2. Trade and supply chains: Adaptation, not retreat
    • U.S. trade flows remain near record highs despite tariff volatility.
    • Policy shifts are reshaping supply chains, rather than shrinking them—as a result re-shoring and nearshoring are fueling demand in select markets.
  3. Performance gap is widening
    • Premium pricing: The spread between top and bottom quartile assets has widened 66% since 2020.
    • Income advantage: Top-quartile assets generate ~90% more NOI per square foot.
    • Rent growth is concentrated in top-tier markets; weaker locations are delivering flat or negative results.

Amid this backdrop, a window is opening for industrial development. While rising costs remain a challenge, the pullback in new construction sets the stage for an attractive 2026–27 opportunity, as limited deliveries meet renewed demand. We believe investors who focus selectively on modern facilities with strong tenant demand are positioned for attractive returns. Recent performance underscores this trend: assets built since 2010 experienced total returns of 6.3% over the past year, nearly double that of older properties. We believe targeted industrial development offers a compelling investment approach.

State of the industrial market and potential recovery

The industrial sector has emerged from a correction that began in 2022 and reverberated across the broader commercial real estate landscape. The primary driver was the Federal Reserve’s aggressive monetary policy response to inflation, which peaked near 8.5% that year. While the broader economy proved resilient—supporting risk assets such as equities—real estate valuations, which are highly sensitive to interest rate shifts, declined nearly 20% from their peak (NCREIF NPI). For industrial, the drop was a more moderate at 12.3%, smaller than all major property sectors except retail.

Operationally, the sector held up relatively well. Challenges stemmed primarily from excess development and policy uncertainty around tariffs and global trade. Even so, industrial remains a favored allocation for investors, given its central role in domestic and international supply chains. Demand has stayed broadly stable, and asking rents have generally kept pace with—or slightly exceeded—headline inflation.

Notably, the sector has maintained attractive income performance. Net operating income (NOI) growth has averaged in the mid-6% range, supported by significant mark-to-market gains. Nationally, in-place leases have reset roughly 40% higher over the past five years, providing durable cash flow growth (see Exhibit 1).

Industrial NOI growth stands across real estate sectors

Same Unit NOI Growth, annual % change

Chart showing industrial net operating income growth across real estate sectors.

Source: Green Street, Principal Real Estate, August 2025.

Opportunities for new development

The case for development is often difficult as it relates to a myriad of factors including replacement costs, which today remain elevated on a relative basis. This paper has also highlighted several challenges to the industrial sector today, but seasoned real estate managers understand that timing and positioning remain critical to a successful opportunistic strategy. Putting the current state of the market in context, more subdued demand may be a function of short-term uncertainty but easing supply pipelines and strong interest in newer vintage assets presents opportunities today.

According to data from CBRE EA, new supply will slow to its lowest level since the Global Financial Crisis by 2027 with vacancy rates falling over the same period. We continue to have a high degree of conviction that those assets delivered will stabilize quickly as there will be pent up demand for modern facilities. In fact, only 25% of industrial stock has been delivered since 2010 meaning that there is a lack of modern logistics facilities to accommodate the growth in demand from third party logistics providers and key e-commerce companies.

Favorable market balance will draw investor interest in 2026

Industrial completions and availability

Chart displaying industrial completions and availability from 1990 to 2025 and then forecasted till 2029.

Source: CBRE EA, Principal Real Estate, Q2 2025.

Conclusion

Industrial remains a core allocation, but the recovery will be uneven, and broad, undifferentiated exposure risks will likely lag returns. The greatest opportunities lie in selective development, enabling investors to curate portfolios of next-generation assets in markets with durable, long-term tenant demand. Investment performance will ultimately hinge on targeted exposure—modern facilities, prime logistics hubs, and disciplined development strategies.

For more of our thoughts on the broad industrial sector and what the future of industrial development looks like, access the full report here.
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Risk Considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate.

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MM14683 | 09/2025 | 48009179-092026
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