2025 Global Outlook – The Industrial Sector

Industrial absorption exploded during the pandemic, and high levels of tenant demand persisted for several years. This phenomenon started in the U.S., but quickly found its way to the U.K., then to continental Europe, and finally to Asia and other countries such as Canada and Brazil. Watching these trends take place in succession was truly a textbook case of global pattern recognition. The fundamental drivers that kick-started that wave of demand are well past their peak, even if they continue to have influence into the near future.
In the U.S., we’ve seen a moderation in demand and rent growth from what were unsustainable highs. Like the initial uptick, this slowing started in the U.S., spilled over to the U.K., and has found its way into Europe and Asia more recently. Despite the softening in fundamentals, capital markets have remained enamored with the industrial sector. As such, the sector remains fairly if not fully priced.1 This is particularly true for assets with short-term rollover of seasoned leases where buyers can underwrite large NOI gains on expiring leases given the accrued market rent growth that has occurred since the lease was signed. By way of example, consider the chart below, which illustrates a five-year Sydney industrial lease with CPI-based annual rent increases that reset to market every five years.