From 2020 to 2023, warehouse vacancies hit record lows as companies stockpiled safety inventory to mitigate disruption risks during the most volatile point in recent supply chain memory. Then, as the pandemic subsided and supply chain practices went back to something resembling normal, the industrial real estate sector began to experience a normalization from those record highs.

As a result, in 2024, the warehouse market was marked by too much inventory and higher vacancy rates, fueled by delivery on speculative projects that had broken ground during the last days of the pandemic frenzy. As such, 2024 is now largely being seen as a year of market correction.

Going into 2025, that correction is nearing its completion. Here are four factors that will help drive increasing demand for warehouses in 2025.

1. There are fewer facilities being built.

Just as the plethora of new inventory in 2024 pushed the vacancy rate skyward, so will the lack of new deliveries help vacancy tick back down again in 2025. The amount of industrial space under construction has fallen steadily since the last quarter of 2022, which means tenants seeking new warehouses in 2025 will not see a flood of newly built inventory options. Instead, existing facilities will become more competitive and valuable, and vacancy rates will trend downward again as the market finishes normalizing.

2. More tenants are engaging in a “flight to quality.”

As semi-automated and automated logistics technologies become more frequently used, warehouse tenants are seeking facilities that can support them. This might mean better power capacity, higher ceilings, more dock doors, floors that can handle heavier weights, roofs with solar panels, and any number of other factors depending on the needs of the specific business.

This trend will have an interesting impact on the industrial market. Vacancy rates will remain lower for newer or updated facilities, while vacancy rates may climb for older assets. In turn, vacant older assets will get updated to meet the needs of modern tenants, which will ideally contribute to a more modern industrial asset pool overall.

3. Ecommerce continues to grow.

Despite the volatility in the supply chain and the U.S. economy, American consumers have not backed off from buying the things they want online. With ecommerce expected to grow more than 8% in 2025, online and omnichannel sellers will need more space to accommodate that growth.

It is an accepted rule of industrial real estate that ecommerce operations take about three times more warehouse space than traditional brick-and-mortar retailers need from their warehouses. As such, steady growth of this type in ecommerce is always good news for the warehouse market.

4. Retailers are outsourcing more to 3PLs.

Many retailers do not have comprehensive in-house logistics capabilities the way megaretailers like Amazon or Walmart do. This can make it challenging to compete in an arena where customers continually demand a wider array of delivery options and a higher level of service.

To meet those demands, retailers often choose to get help from third-party logistics (3PL) providers rather than making the massive upfront investment required to establish a national warehouse network and its associated logistics infrastructure. 3PLs led bulk industrial leasing activity in 2024, and this trend will continue in 2025 as companies strive to build more effective, disruption-resistant supply chains.

A Familiar New Normal

After years of soaring records followed by a painful normalization, the warehouse market in 2025 may start to feel familiar to those who have been in the industry since before the pandemic. While tenant and owner motivations and goals may be different, the market itself should reach a stable balance between supply and demand that looks like the pre-pandemic era.

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 record of accomplishment 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.