Industrial REITs Face Headwinds as E-Commerce Growth Slows

Industrial real estate investment trusts, which delivered exceptional investor returns from 2020 through 2024 on the back of explosive e-commerce growth, are now navigating a more challenging environment. Major industrial REITs including Prologis, Duke Realty successor DUKE-BX, and EastGroup Properties reported softer leasing spreads in their most recent quarterly earnings, with average new lease rates growing just 8.2% over expiring leases — down from the 28 to 35% mark-to-market spreads that characterized the pandemic growth cycle.

The deceleration reflects a normalization in e-commerce demand after the extraordinary pull-forward in online shopping that occurred during COVID-19. Amazon, the single largest tenant in the industrial REIT ecosystem, has actively right-sized its logistics network, closing some distribution centers and declining to renew leases on others that no longer fit its optimized fulfillment architecture. The company's announced reduction of approximately 80 million square feet in leased industrial space is being absorbed slowly as REITs work through expiring lease rollovers.

Vacancy rates in major industrial submarkets are rising from historic lows. The national industrial vacancy rate has climbed to 6.1% from a trough of 3.4% in early 2023. Inland Empire, the dominant Southern California logistics hub, has seen vacancy jump from 1.2% to 5.8% as a wall of new supply completes construction. Developers who broke ground during the frenzy of 2022 are delivering product into a market that has cooled meaningfully.

Despite the near-term headwinds, most institutional real estate analysts maintain a long-term positive view on industrial real estate. The structural drivers — continued e-commerce growth, supply chain reshoring, cold storage demand from grocery delivery expansion, and data center adjacency — remain intact. The current cycle is viewed as a digestion period after a historic supply-demand imbalance rather than a structural deterioration in industrial fundamentals.

For investors, the pullback in industrial REIT valuations has created potential entry points. Several major industrial REITs are trading at discounts to net asset value for the first time since 2019, attracting value-oriented buyers who are willing to accept near-term earnings pressure in exchange for exposure to what they view as the most structurally sound major commercial property type.

Smaller investors and syndicators who participated in the industrial gold rush are facing a harder path. Properties purchased at peak cap rates of 3.5 to 4% are now in markets where the going-in yield expectation has risen to 5.5 to 6%. Refinancing these assets as debt matures is becoming a painful exercise, and some secondary and tertiary market industrial assets are trading at material discounts to their original acquisition costs.