by Jake Wilson, on Apr 16, 2025 7:00:00 AM
The United States industrial real estate market is nearing the end of an era categorized by record speculative development of warehouse space. For the first time in over a decade, manufacturing and distribution companies that can make use of standard shell construction are put in a position that requires weighing the cost of building a new facility versus buying and retrofitting an existing property. Site Selection Group, a full-service location advisory, economic incentive, and real estate services firm, routinely assesses fundamental real estate questions that clients typically have: Should I lease or purchase? Greenfield construction or a brownfield retrofit?
Record industrial speculative development
The national net new supply of industrial buildings peaked in Q4 of 2023 at 151 million square feet. However, subsequent deliveries have fallen significantly below pre-pandemic annual averages. Groundbreaking of new construction peaked in 2022 but has since slowed due to macroeconomic factors like rising vacancy rates, higher interest rates, and a pullback in the e-commerce sector.
Source: CoStar
Vacancy concerns for landlords and developers
The rapid pace of construction has led to increasing vacancy rates, which have now approached 7% — the highest level since 2014, when the market began recovering from the peak vacancy caused by the Great Recession. The table below highlights the top 12 U.S. markets with the highest vacancy rates (among markets with at least 100 million square feet of industrial inventory). These extremes are apparent in markets like Dallas-Fort Worth, which has a vacancy rate of 9.5% with a total of 128 million square feet of available space within the metro area.
Market |
Vacancy Rate |
Available SF (Direct) |
| Charleston, SC | 15.10% | 17,612,741 |
| Phoenix, AZ | 12.30% | 67,367,309 |
| San Francisco, CA | 12.20% | 13,322,146 |
| Spartanburg, SC | 11.50% | 14,577,458 |
| Austin, TX | 11.20% | 28,276,945 |
| Reno, NV | 11.20% | 14,087,995 |
| Savannah, GA | 11.10% | 20,573,851 |
| Las Vegas, NV | 10.30% | 23,918,188 |
| San Antonio, TX | 9.80% | 21,162,661 |
| Charlotte, NC | 9.60% | 38,319,135 |
| Dallas-Fort Worth, TX | 9.50% | 128,591,137 |
| Indianapolis, IN | 9.40% | 41,048,152 |
Source: CoStar
A shift from a buyer’s market to a seller’s market
During the speculative development boom, landlords and developers were often reluctant to sell newly constructed vacant buildings. Factors such as soaring rental rates, a favorable capital markets climate, and strong net absorption kept sellers in control. Most landlords insisted on waiting to sell until they secured a long-term lease or would only agree to sell a vacant building if it was valued based on cap rates associated with a leased property of significant term and stellar credit. This resulted in the average sales price of a logistics property peaking at $147 per square foot in 2022 and 2023.
Source: CoStar
In 2022, average market cap rates for logistics properties hit a record low, creating unfavorable conditions for buyers. However, with vacancy rates now at a 10-year high, the market has begun to balance. Cap rates have increased by 1.5 percentage points year-to-date, signaling a shift in purchasing power back toward buyers. Landlords, no longer benefiting from the same high absorption rates seen during the pandemic, are now more inclined to sell properties at lower profit margins relative to their construction and holding costs.
What does this mean for companies looking to own their facility?
The combination of high interest rates and rising construction costs — driven by factors like inflation and tariffs — makes building a new facility financially challenging for many companies. Here's a summary of key insights:
- Purchasing may be more cost-effective than building: For the first time since before the Great Recession, there are U.S. markets where the cost of purchasing an existing building is less than the total cost of building a new one.
- Favorable market conditions for buyers: While the future of tariffs and interest rates remains uncertain, the current oversupply of industrial inventory suggests that the market will remain favorable for buyers for the foreseeable future.
- Speed-to-market advantage: The ability to move quickly by purchasing an existing building has made the brownfield retrofit strategy increasingly appealing.
- Favorable terms for buyers and tenants: With the industrial real estate market softening and vacancy rates rising, both buyers and tenants are in a stronger position than they have been in years. They can now leverage the market to secure optimal purchase or lease terms.
Conclusion
The dynamics of the U.S. industrial real estate market have shifted significantly. As vacancy rates rise and construction costs continue to climb, companies now have an opportunity to purchase existing properties at more favorable prices than ever before. For those looking to own their facility, this could be the ideal time to reconsider the choice of building new and instead explore the benefits of purchasing or retrofitting an existing space.
