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5/27/2025
by Ross Adams, U.S. Industrial Specialist – Research & Strategy
The April 2nd announcement by President Trump of higher-than-expected tariffs on all US trading partners, as well as subsequent iterations of US policy and expected retaliations from China, has fueled high levels of uncertainty surrounding the economy, financial markets and impacts to real estate.
The impact that tariffs will have on property markets is unknown, as it depends on the level of tariff, as well as the composition of countries and products that are tariffed. Generally, if the baseline view assumes 10% or less tariffs on selected goods and materials, but higher levels on China, we believe that will result in slower economic growth and above-target inflation in the near term.
At present, we believe that the announced tariffs have created heightened price uncertainty resulting in delayed decision-making broadly across the economy and this has dampened space demand and could also result in decelerating economic growth.
In our view, the indirect impact of higher prices and input costs on production could result in reduced and/or redirected spending with lower retail sales growth and tempered new industrial space demand in the near term. We believe that over the longer term, the market will likely adjust to prices, demand levels will likely be aligned with growth and inflated replacement costs of new warehouses could potentially drive higher rent levels.
It is difficult to segregate total industrial space demand between the sector’s diverse drivers and even among markets. While import flows are concentrated at the nation’s primary seaports, the resulting demand tends to be pulled-in by economic activity within our large population centers.
Direct near-term impacts to industrial markets may result in less frictional demand at the primary import gateways (transloading), but overall economic growth (Gross Domestic Product) and consumer behavior (e-Commerce) remain the primary drivers of total industrial space demand. Domestic production growth (onshoring) should serve to stimulate the economies and consumption in the markets and regions where it occurs.
Near-term negative impacts of tariffs may be more evident in the primary port markets in the West and Northeast regions, where local economic growth is more moderate. Property markets in the higher growth regions in the Southeast, Southwest and Mountain West, as well as in the larger stable markets in the Midwest and mid-Atlantic regions should fare better.
Over the longer-term, if trade growth ex-China persists, we believe the gateways could continue on a path similar to their pre-pandemic trajectories, which were healthy. Over the longer-term we believe that the industrial sector could perform well, and international trade could continue to drive demand. New tariff measures may lead to price inefficiency and disruption over the near term. However, in our view the market appears well-positioned to capitalize on current market opportunities and long-term structural tailwinds, with the recent pricing correction creating attractive valuations and a compelling entry point for real estate investment.
The US industrial market has been progressing through a moderate downcycle for the past eight quarters whereby quarterly industrial space absorption has been running at about half-speed compared to pre-pandemic long-term trends. Construction deliveries during this time were elevated, averaging about twice the long-term quarterly average.
Generally, market conditions have become more competitive across markets, absent the demand that would typically accompany the economic growth that was experienced in recent years. But speculative development has halted, and absorption within the recent pipeline has remained healthy.
US Industrial Market Baseline – Supply, Demand and Availability
Source: CBRE-EA and DWS Research, as of April 2025
Supply is defined as new construction completions in the year they occur. Demand is expressed as net absorption, defined as the net change in occupied square feet between two points in time (calendar year-ends). Availability is the amount of square feet marketed as available for lease, divided by total stock (inclusive of sublease space).
The US availability rate at 8.9% in the first quarter of 2025 was about 450 basis points above the record cycle lows achieved in 2022 but remained well below the levels from the past two recessions. A national vacancy rate (which excludes sublease and under construction stock) of 6.2%, is closer to balance. Given low vacancy and dwindling new construction, the path of recovery appears to be less arduous compared to past cycles.
Market rent growth has paused or turned modestly negative across most markets, with a small number of markets posting sharper declines (Southern California) and a few maintaining modest positive growth (in South Florida and the Southeast).
The new tariff regime has clouded and likely delayed the recovery potential in the current cycle. Those impacts could play out over a longer period if there are policy missteps, but we believe that tariff and trade related issues will be resolved in 2025, which should restore the ability for businesses to plan for growth.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are not a reliable indica-tor of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.
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War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led and, in the future, may lead to significant disruptions in US and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the fund and its investments.
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R-070495-4 (7/25)
