The global pandemic had a lasting influence on the economy in the form of heightened inflation. In response to this inflationary environment, the Federal Reserve started hiking interest rates in 2022 to force demand and prices down. These rate hikes, among other factors, contributed to a rebalancing of supply and demand in the industrial real estate sector.
In 2024, the Fed started cautiously cutting those rates again as inflation trended downward. The Fed has put additional rate cuts on hold, however, as they wait to see how tariff policies and other factors impact inflation. Just over half (55%) of economists surveyed by Bankrate believe that inflation will remain high through at least 2027.
Inflation and Industrial Real Estate
Prior to 2022, excitement to feed market demand led to record construction. Vacancy rates for industrial properties hit record lows as businesses sought bigger and better facilities to accommodate higher consumer demand or more advanced manufacturing techniques.
However, as interest rates climbed, those new developments became cost prohibitive. Then, as a wave of new warehouses and factories hit the market, vacancy rates started climbing. These factors combined to slow the industrial building boom, and the sector began to rebalance itself after two years of elevated and unprecedented demand. Key metrics like vacancy and absorption rates began to trend back toward pre-pandemic levels.
The national vacancy rate for industrial eventually leveled out just under 7% in 2024 as interest rates kept climbing. Higher lending costs added more risk to speculative building projects, and investors, developers, and property owners put new facilities on hold as they waited for both vacancy and interest rates to fall.
What Inflation Could Mean for Industrial in 2025
A new presidential administration and the new policies that come with it have shaken up the U.S. economy. In Q1 of 2025, data from the U.S. Department of Commerce showed that the U.S. gross domestic product (GDP) contracted slightly for the first time since 2022. It also showed that inflation was holding relatively steady.
According to Frank Crivello from Milwaukee-based commercial real estate broker Phoenix Investors, here are some of the ways inflation could impact industrial real estate through the end of the year:
- Funding challenges. The biggest impact of inflation on industrial real estate in recent years has been difficulty borrowing money for new projects. With 2025 vacancy rates still hovering above 7%, there is less need to borrow for speculative builds. Where developers in 2022 and 2023 were flooding the market with new properties, now new constructions have slowed significantly as industry stakeholders wait for the market to rebalance.
- Strong fundamentals. Even with elevated inflation continuing to threaten the economy, the fundamentals of industrial real estate have remained strong. As long as inflation stays relatively steady and doesn’t soar completely out of control, 2025 will still be a solid year for industrial thanks to the relentless e-commerce demand that keeps pushing growth in the sector.
- Pushing demand into secondary markets. As inflation drives up costs in primary markets, traditionally lower cost areas like the Midwest will continue to benefit. We’re already seeing this in markets like Detroit, which has one of the lowest vacancy rates in the country.
Thankfully, the industrial real estate sector has proven its resilience against inflation in recent years time and again. With core drivers like reshoring, data centers, and e-commerce continuing create reliable demand, the sector is well-positioned to ride out any economic instability and inflationary surges that the rest of 2025 may bring.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.
