Fewer Industrial Construction Projects Start as Uncertainty Stalls Decisions

It’s hard to make a warehouse these days if you can’t make a decision.

The 90-day pause on the Trump administration’s sweeping global tariffs is set to expire July 9. And, while it’s going to be a scramble for nearly every asset class, the country’s industrial market has already seen a significant slowdown in construction starts and leasing decisions.

Industrial construction starts in the U.S. are on pace in 2025 to hit their lowest level this decade, given the 86.9 million square feet in starts through May of this year, according to a new report from data tracker CommercialCafe. Developers started on 116.1 million square feet during the same time period in 2024 and on 158.3 million feet in 2023. The peak for this decade was in 2022 with 228.5 million square feet through May that year.

Tariffs are not the whole story. Some 342.3 million square feet were under construction nationally as of May, while only 117.8 million square feet have been delivered so far this year. That’s compared to the roughly 650 million square feet delivered in 2023, the report found.

The drop in construction starts is largely a result of companies catching up with the overabundance, or “glut,” of new construction delivered during the COVID-19 pandemic, when developers built in a frenzy to keep up with demand, according to Gregory Healy, head of industrial services for North America at Savills.

“It’s a trifecta of challenges right now,” Healy said. “We’re seeing volatility, inflation and capital constraints impacting construction starts. … There was a lot of overbuilding [during the pandemic] because the demand for industrial was infinite. And now we’re trying to get back into equilibrium with the market for supply and demand.”

While the pullback in new industrial construction was expected this year, uncertainty around the tariffs hasn’t helped the situation, with increased material costs and delayed decision-making slowing the rate at which newly delivered supply is being absorbed.

“The uncertainty caused by [the tariffs] right now is worse than the effects of the actual tariffs,” said Peter Kolaczynski, associate director at CommercialEdge and an author of the CommercialCafe report. “It’s always a question of how much that’s deterring the decision-makers from making these decisions versus just having a policy and sticking to a policy.”

Shrinking supply might be good for landlords looking to fill their industrial spaces, but when they ultimately have to build again, they’ll likely face increased materials costs from Trump’s 50 percent tariff on imported steel. U.S. construction firms imported $32 billion in steel in 2024, and the demand for steel far exceeds the current supply, according to CommercialCafe’s report.

Developers and contractors will be most severely impacted by the tariff on imports from China, which is the world’s largest steel producer and exporter, and by the tariff on imports from Canada, which exported approximately $7.1 billion worth of steel to the U.S. in 2024, according to the Canadian Chamber of Commerce.

But it’s not just material prices industrial developers are concerned about — it’s land prices, too.

“We’ve seen a lot of these surges before, and we seem to adjust to them,” David Knee, vice chairman at JLL, said. “Even with the commodity prices, the steel and the oil and those things going into building materials, the other piece of it is land. So your total building cost is not just one element or another.

“And I think you’re seeing companies even look at different types of building materials,” Knee added. “I think there are architects and engineers looking very hard at utilizing wood versus steel. So you might see that become a trend in the next few years, if that proves to be sustainable.”

The slowdown in construction starts also means fewer options for tenants, who are often hesitant to commit to long-term leases or build their own facilities until solid trade policies are formed.

Master Wall — which manufactures exterior insulation finishing systems, air and water barriers, coatings and adhesives — is one of those tenants dealing with the uncertainty.

A few years ago, Master Wall moved its production facility out of the Atlanta metro area to build a new plant and office in Columbus, Ga., where it rezoned a property and met with an architect to discuss financial needs, Steve Smithwick, founder and CEO of Master Wall, said.

“We were more than surprised at the cost of new construction,” Smithwick said in a statement. “Even though we are in the manufacturing business to make wall components, the cost exceeded our expectations. Bottom line, with the interest rate being in the 5 to 7 percent range, we abandoned the goal of building a new manufacturing and home office facility. Since then, we have been searching for existing buildings that could meet our needs.”

And when it comes to leasing for Master Wall — which rents space in Florida, Pennsylvania, Texas, Utah and Georgia — Smithwick said he noticed a “substantial increase” in rents, with rent on its Florida lease increasing 90 percent over the previous five-year lease rate.

Still, it seems most industrial tenants are going the renewal route, as the renewal market has been “pretty healthy” lately, Knee said.

One landlord seeing that renewal trend is private equity firm Redfearn Capital, which specializes in the acquisition, development and management of industrial properties across the Southeast, specifically bulk distribution centers, warehouses and manufacturing facilities. Its more than 250 industrial tenants include Beacon Roofing Supply, ABC Supply, FedEx, Sherwin-Williams and Goodman Manufacturing.

“From what we’ve seen with our own tenants, any time there’s uncertainty, especially with something that impacts pricing and profitability, you’re seeing a lot of these tenants just pause decision-making, which makes it really hard for developers or landlords to project what the next six months or 12 months is going to look like,” said Alex Redfearn, CEO and founder of Redfearn Capital.

“Most tenants are just renewing and staying in place rather than relocating and taking a big jump in their rent expenses at this point,” Redfearn added. “So it’s something I think we’ll continue to see until there’s some final shakeout on the tariffs.”

In fact, the national industrial vacancy rate rose to 8.5 percent in May, up 290 basis points year-over-year but down 30 basis points from April, according to CommercialCafe. In New Jersey, specifically, about 9.6 million square feet is currently under construction, of which only about 25 percent is pre-leased, compared to the average pre-lease rate of 75 to 80 percent in its “heyday,” according to Knee.

As for sublease availability, 160.5 million square feet of industrial space was available for sublease nationally at the end of the first quarter of this year — higher than sublease availability during both the pandemic and the Global Financial Crisis from 2007 to 2009, Healy said.

Tenants’ hesitancy to commit to new space also stems from the “concern of eroding consumer demand” resulting from the tariffs, as consumers may begin to limit spending to avoid added costs, Healy said.

“If we demand less goods, then we have lower demand for these warehouses, which will in turn decrease the demand for new construction,” Healy said. “Whether companies decide to absorb as much as they can to mitigate the impact of tariffs, or whether they pass those costs on to consumers — which ultimately they will do — will probably decrease overall consumption, and that decreased consumption is really the underlying reason for weakening demand.”

Redfearn said his approach to the situation is simple: forbearance.

“Everything just takes longer, so we just have to be patient,” he said. “I think buying on a good basis and leasing at market rents, not above market, is a way to keep the buildings leased.”

Meanwhile, Greek Real Estate Partners (GREP), which manages industrial properties across New Jersey, Pennsylvania and New York, is one landlord still vigorously developing amid the uncertainty in the market, albeit from a “relatively conservative” angle, according to managing partner David Greek.

Just in May, GREP acquired two major industrial properties on the East Coast — the 141,276-square-foot Everest Logistics Park in Croydon, Pa., for $36.8 million, and the 100,000-square-foot Trinity Commerce Center in Trinity, Fla., for $22.5 million.

“We are still very aggressively pursuing development sites,” Greek said. “That said, we think there’s definitely some weakness in the industrial market that we’ve seen for the past six months. We’ve been witnessing some weakness in tenant demand, and that’s why we’ve seen rising vacancy rates.”

Still, Greek said the firm believes “this is a point in time that will pass,” and that the trajectory for the country’s industrial market, especially in the Northeast, is a “very good, very bullish one.”

Things might not be so good on the West Coast, though, as tariffs continue to disrupt shipping volumes to key ports.

The Port of Los Angeles handled 25 percent less cargo than forecast in May, while job postings at the port were down by half, according to CommercialCafe’s report. The May dip reflects the initial 135 percent tariff placed on Chinese imports that went into effect in April, as ships take about six weeks to arrive in the U.S., the report said.

Ports along the West Coast, specifically in L.A., will see a larger impact from trade friction with China due to their proximity to Asia and position as the nearest ports of entry into the U.S., while East Coast ports may be slightly better off as they receive products mostly from Europe and India, Savills’ Healy said.

“There’s no question that port volume is down significantly, and I think their sort of big-box market is the Inland Empire, where deals are way off statistically,” JLL’s Knee said, referencing the California region. “So I think we just have to pay attention to those rates, because they can have a bigger impact on demand and where it’s going.”

The drop in cargo volume at ports, combined with concerns over consumer demand and leasing, has pushed industrial tenants to consider shifting their supply chains to within the U.S. in order to reduce the impacts of foreign fees.

In fact, companies are leaning on a set of “short-term tactics” to navigate the disruptions, according to a new report from J.C. Renshaw, head of supply chain consulting for North America at Savills.

Those tactics include stockpiling goods in anticipation of a future supply shock, turning to bonded warehouses and foreign-trade zones, using third-party logistics providers, shifting sourcing and production, rerouting to lower-duty ports, redesigning products into lower-duty classifications, and investing more in technology and automation, according to the report.

“Geopolitics, trade policy and tariffs, climate events and cost variability can significantly impact the global flow of goods,” Renshaw said in a statement. “While the longer-term strategy may be to incorporate flexibility and resilience into supply chain operations via shoring initiatives, [these short-term tactics] are the preferred path for many companies in dealing with current uncertainty and disruption.”

Some experts think it’s more important to absorb the excess space in the market before turning to alternatives.

“There’s a big push to increase manufacturing in the United States, but to uproot a globally dependent supply chain overnight isn’t possible,” Healy said. “It takes a lot of time and planning. … We have to absorb the excess in the market first, before we come to a point where we have a need to develop additional capacity.”

No matter how companies find their footing amid the uncertainty, President Trump’s erratic trade policies are set to have a major impact on the U.S. industrial market, with the full brunt expected sometime during the third and fourth quarters of this year and beyond, Healy said.

And while e-commerce, cold-storage, and food and beverage tenants will likely survive the impact, others will feel it a bit more.

A recent analysis by J.P. Morgan Chase found that a critical group of U.S. employers — businesses with $10 million to $1 billion in annual revenue, or roughly a third of private-sector U.S. workers — is set to face a direct cost of $82.3 billion from Trump’s current tariffs, the Associated Press reported.

Most of those companies, which are largely retail and wholesale businesses dependent on imports from China, India and Thailand, built up their inventories before the taxes could be imposed, but the other shoe is bound to drop soon.

“I don’t believe that tariffs are the solution to the challenge that we have with global inequality in trade,” Healy said. “We will feel the impact of the tariffs more in the United States, and it will impact industrial real estate demand more than they will feel it on the other side of the world.”

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