Economic uncertainty caused by shifting tariff policies and persistently high interest rates have taken their toll on industrial real estate activity, with only 27 million square feet absorbed in the first half of 2025 and demand shrinking by 11.3 million square feet in the second quarter – the first quarterly decline since 2010.

According to the NAIOP Research Foundation’s latest Industrial Space Demand Forecast, net absorption is expected to be nearly flat over the second half of 2025, but demand will begin to grow again in 2026.

“Demand for industrial space is expected to recover somewhat after occupiers have time to adjust to a new tariff regime,” according to the report. “However, higher tariffs and slowing employment growth will likely result in slower demand growth than that experienced from 2020 to 2022 or in the six years that preceded the pandemic. Absorption is expected to rebound beginning in the second quarter of 2026, with full-year absorption totaling 119.3 million square feet. Another 109.7 million square feet of absorption is expected in the first half of 2027.”

Demand for industrial real estate has been influenced by several factors, according to the report:

• Changes in U.S. trade policy, which could alter the strategies of occupiers that import raw, intermediate and finished goods, as well as those that export products abroad.
• Slow employment growth from May through July that suggests a broader slowdown in the economy is underway.
• Higher interest rates in recent years. Many expect the Federal Reserve to cut the federal funds rate by the end of 2025 if the employment market remains soft. The report notes that “falling rates and greater clarity on tariffs could reduce uncertainty and spur greater demand for industrial space, leading to a return to positive absorption in early 2026.”

“While the latest forecast reflects the impact of tariffs and a cooling economy, history has shown that industrial real estate remains a resilient sector,” said Marc Selvitelli, CAE, president and CEO of NAIOP. “We anticipate a measured recovery in demand beginning in 2026 as markets adjust and fundamentals stabilize, positioning the sector for a return to stable growth.”

The semi-annual report is authored by Hany Guirguis, Ph.D., dean, O’Malley School of Business and professor, economics and finance, Manhattan University; and Joshua Harris, Ph.D., executive director, Fordham Real Estate Institute, Fordham University.

Download the full NAIOP Industrial Space Forecast: naiop.org/industrialdemand