Industrial Construction Slows and Lease Terms Shift Amid Tariffs: Report

New trade policies under the Trump administration are causing a slowdown in construction and a change in lease terms in the U.S. industrial market, according to a recent report from Savills.

President Donald Trump’s global tariffs, which were put in place last month, have caused general uncertainty around economic growth, job growth, inflation and interest rates, but they’ve also “injected caution into a globally dependent industrial landscape,” Savills said in its report.

As a result, the industrial development pipeline in the country has decreased 62 percent from its peak during the fourth quarter of 2022 of 806.9 million square feet and fallen back to 2018 levels, as fewer projects are expected to break ground in 2025 due to increased costs of imported construction materials, the report found.

The 306.9 million square feet of industrial space currently under construction in the U.S. is projected to decline over the next year, while the current 88.7 million square feet set to finish construction is also likely to shrink, and the current vacancy rate of 7.8 percent is set to increase.

“Tariffs won’t slow warehouse demand overall in the long term, but they will change where and how logistics facilities are built,” Gregory Healy, executive vice president and head of industrial services at Savills, said in a statement sent to Commercial Observer.

“Expect a long-term trend toward more domestic-oriented supply chains, strategic inventory management driving space needs, and higher construction costs necessitating more efficient designs,” Healy added.

As for leasing, industrial leasing during the first quarter of 2025 totaled roughly 180 million square feet, holding pace with 2024, the report found.

However, the quickly shifting trade policies are projected to “slow tenant activity” and “drive short-term renewals” and subleasing instead, as landlords in about one-third of markets have decreased asking rents by 5 percent or more due to rising concessions, Savills said.

Meanwhile, the task of bringing production back to the U.S. — known as manufacturing reshoring — might not be helped by the new tariffs. In the wake of Trump’s prior steel and aluminium tariffs, reshoring job announcements fell 7.6 percent year-over-year in 2018 and 32.9 percent year-over-year in 2019, Savills found. 

Reshoring announcements spiked in 2022 but are projected to fall about 20 percent from 2024 to 2025, according to Savills.

And while few manufacturers have cited tariffs as a driver for reshoring, “sustained policy could change that,” Savills said. From 2010 to 2025, the top three factors cited for reshoring were government incentives, proximity to customers and the availability of a skilled workforce.

“Although tariffs tend to raise construction costs, they may also stimulate domestic industrial activity — especially if aligned with broader reshoring trends and government incentives,” Healy said. “The net effect could be positive for industrial demand but challenging for construction margins unless cost pressures are offset.”

In addition, port markets trading heavily with China, especially ones in West Coast areas like Los Angeles, are facing the “most risk” from the tariffs, compared to trade hubs with domestic scale, according to Savills.

Industrial markets along the Texas border, which have seen good numbers in the past year, are also set to face an “inflection point,” as container crossings there grew 61 percent from 2023 in 2024, totaling nearly 9.5 million containers.

Retailers that depend on those ports for their products — including Shein, Best Buy, Dollar Tree, Ikea and Walmart — have outlined plans to mitigate the impact of tariffs, including managing cost pressures and adjusting prices, reconfiguring supply chains to source domestically, and leveraging strategic scale and finding new supplier relationships, Savills found.

Isabelle Durso can be reached at idurso@commercialobserver.com.