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Industrial realignment: Trade, ports, and market shifts

June 13, 2025
Rich Hill
Global Head of Real Estate Research & Strategy
Art Jones
Senior Director, Global Real Estate Research and Strategy
JD Stehwien
Senior Analyst, Global Research
Thomas McGing
Analyst, Global Research
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The U.S. industrial sector has been at the center of the debate over deglobalization for the past half decade. While there is still significant debate over a potential reversal of globalization, the paucity of data supporting claims and economic reliance of increasingly integrated supply chains suggests that we are entering a period of realignment of global supply chains.

Recently, policy shifts in the U.S. toward global trade agreements suggest that the industrial and warehouse sectors in the U.S. are facing a period of transition. Although the full implications of a more restrictive trade—at least in the near term—have not been fully observed in the data, they have placed the sector under increased scrutiny.

In this paper, we examine the industrial sector’s changing landscape, highlighting the key implications for investors and operators as the environment becomes more complex and selective. We will also discuss the longer-term implications for the sector, which we believe remains a vital part of the global economy’s infrastructure.

Market performance and capitalization trends

Recent shifts in U.S. trade policy have cast a shadow over the industrial sector’s outlook. The sector entered 2025 after a challenging year for operators, largely driven by a moderation in demand, active supply pipelines in key markets, and continued capital market challenges that have affected nearly all property sectors. Recent policy changes—particularly the broad-based implementation of tariffs—have the potential to shift the environment dramatically.

The industrial sector’s recent history is characterized by outsized returns and surging investor interest. Since the pandemic, the sector has averaged total returns of over 12%, placing industrial assets among the best performers in commercial real estate. The sector, however, has not been immune to the cyclical downturn since 2022, which has seen private equity values decline by 12.3% since peaking in 2022.

While industrial has continued to perform well on a relative basis, over the past couple of years, it has underperformed the retail sector, particularly in the open-air shopping centers, which has been the strongest traditional sector (see Exhibit 1). Furthermore, public REITs, which tend to foretell cyclical shifts in private equity, sent cautionary signals in 2024 as industrial REITs were the worst-performing of 18 REIT subsectors.

EXHIBIT 1: The Industrial sector has lost some of its swagger

NPI annualized total returns by property type, ranked

NPI annualized total returns by property type, ranked

Source: NCREIF, Principal Real Estate, 1Q 2025.

Net operating income growth and rent dynamics

Despite challenges to the sector, strong rent and occupancy over the past several years continue to translate into healthy and, in some cases, robust NOI growth. In 2024, for example, the sector experienced 6.8% NOI growth on a year-over-year basis, which is more than twice the historical trend of 3.2%. We anticipate NOI growth to remain solid over the next five years at 4% annualized in the base case and nearly 3% in a downside scenario.

Such stability, even under a more challenging scenario, is due to current market rents holding an 8% premium over in-place rents in Q1 2025. This spread indicates that tenants renewing face higher rents than those with existing leases, boosting NOI prospects in the short term..

EXHIBIT 2: Income growth will play a key factor in forward-looking returns

Same property NOI growth by property sector, %, as of 2024

Same property NOI growth by property sector, % as of 2024

Source: Green Street Advisors, Principal Real Estate, 1Q 2025.

Trade policy shifts, port activity, and supply-chain reconfiguration

Amid the nascent recovery in industrial occupancy, the looming question for the sector remains the impact of tariffs on warehouse demand. Policy lag suggests that it is too soon for us to witness any hard data on the impact of the Trump administration’s tariff policy, however, the industrial sector appears to be squarely in the crosshairs should effective customs rates remain elevated. It is also important to consider that longer-term strategic impacts will need to focus on the length and magnitude of increases in customs fees, which appear even today to be a moving target.

While our view remains that the sector will continue to see strong secular demand over the long term, in the near-term policy uncertainty is a concern. Our view is that the tactical narrative is one of quality asset selection. More recently, larger warehouses and modern logistics spaces have experienced healthy demand, while older functionally obsolete facilities remain challenged.

The flight-to-quality trend supports rent growth potential in newer, higher-quality assets. Small warehouses have also maintained tight vacancies, while big-box facilities saw higher vacancies due to the new supply, particularly older commodity-based assets. Smaller industrial spaces have historically performed well even in less-than-ideal cyclical environments, particularly those that are located in urban infill locations, which cater to last-mile distribution.

Manufacturing investments in the U.S. have grown considerably in recent years, primarily for manufacturing facilities that produce semiconductors, electric vehicles, and solar panels; all of which are considered strategic, high-value goods that have benefited from government subsidies. In the long term, as these manufacturing capabilities continue to grow, industrial demand will likely grow in secondary and tertiary markets where land is affordable, and labor is available.

The divergence in regional performance has become increasingly pronounced. Coastal markets, particularly in the East and West, have seen their industrial total return indices decline from their peaks in 2022. For instance, Los Angeles, the nation’s largest port market, has experienced a sharp rise in availability rates―from just 1.8% post-COVID to 7% in early 2025―alongside negative net absorption and downward pressure on asking rents.

Where do we go from here?

Are these short-term fundamental trends indicative of NOI growth normalizing to lower levels? The answer depends on economic growth and consumer spending patterns. With macroeconomic growth expectations revised downward narrowing the margin for error between expansion and recession, there are legitimate concerns about future demand. A significant headwind to growth stems from demographic constraints, including limited immigration and population growth to support a sustained expansion, though technological advancements, particularly artificial intelligence (AI), which is still evolving, represent potential tailwinds.

In the long term, it is difficult to assess whether structural risks associated with tariffs represent a lasting headwind for industrial demand. The uncertainty surrounding global trade patterns seems more relevant as a consideration rather than an immediate influence on fundamentals. However, this uncertainty may temporarily pause major capital investments, especially in seaport markets. Looking to the past, Trump’s initial tariffs resulted in a shift in the share of imports from U.S. trading partners, with less from Asia—due to the decline in Chinese goods—offset by higher volumes from partners such as Mexico and Europe. Changing the mix of trade partners will impact various logistics markets according to their current geographic exposure, a trend experienced since 2017, where the East and Gulf Coast gained import market share compared to the West Coast.

EXHIBIT 3: Shifts in trade flows may alter demand patterns for port markets

Goods imports $, 2024

Goods imports $, 2024 by US port

Source: U.S. Census Bureau, Principal Real Estate, 1Q 2025.

Conclusion

Looking ahead, the long-term prospects for the industrial sector will depend on the interplay of these regional trends, ongoing trade policy developments, and the pace of technological change. Over the longer term, we do not subscribe to the theory that globalization is dead; rather we are in the midst of a reconfiguration of trade flows facilitated by shifts in the global supply chain.

In the near term, the U.S. industrial sector is undergoing a period of cyclical adjustment. Investors will need to focus more intently on fundamentals—such as sustainable demand drivers, access to infrastructure, and favorable business conditions—to position for future growth. While the sector’s underlying strengths remain intact, the era of easy, broad-based gains is behind us.

We believe the industrial market is entering a more complex phase—one that demands a deeper understanding of global interdependence, evolving trade policy, and shifting supply chains. Continued long-term global cooperation will be essential, as both domestic and international distribution networks require realignment and investment.

For portfolio managers willing to do the work, compelling opportunities still exist—but they are increasingly found in the details, not the averages.

For more on the current U.S. industrial sector and how trade policy is impacting key port markets, access the full report here.

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