In this episode of The REconomy Podcast™, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi welcome back Senior Commercial Real Estate Economist Xander Snyder to discuss the shifting dynamics within the industrial real estate market. Net absorption for industrial turned negative for the first time in 15 years, a clear signal of a rebalancing market, but a closer look indicates long-term support for industrial demand.

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Listen to the REconomy Podcast™ Episode 124:

“Negative net absorption can mean less space is needed, but it can also reflect tenants relocating to newer facilities or better locations. And remember, this is happening just as that massive pandemic-era supply is hitting the market. Demand is softening, but it’s also mismatched geographically with where the newest buildings are.” — Xander Snyder, Senior Commercial Real Estate Economist

Transcript:

Odeta Kushi - Hello and welcome to episode 124 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing, and affordability. I’m Odeta Kushi, deputy chief economist, and here with me is Mark Fleming, chief economist, and Xander Snyder, senior commercial real estate economist. Hi Mark, hi Xander—or should I say welcome back, Xander?

Xander Snyder - Hi Odeta, it’s good to be back.

Mark Fleming - Hello everyone, and yes, welcome back, Xander. For those keeping score at home, Xander has been away for a little bit. We missed you dearly, my friend, because he just had a baby. Woohoo! How’s new parenthood treating you? You look bright-eyed and bushy-tailed—that’s a good start.

Xander Snyder - So far, so good. Baby’s doing well, my wife’s doing well, and I’m really enjoying those precious hours with the little one after work. It’s a sweet time, and I’ve been told it goes quickly.

Mark Fleming - Trust me, yes it does. Feels like just yesterday—well, okay, I won’t wax nostalgic. Or maybe I will wax on, wax off? No? Starting strong here… terrible, terrible.

Odeta Kushi - Okay, Mark, we don’t have to start the episode by waxing nostalgic.

Xander Snyder - Hahaha! And the ’80s references are already here, even before the economics.

Odeta Kushi - Yeah, but I did set you up for that one. But welcome back, Xander. Welcome back to the ‘80s references.

Mark Fleming - Indeed.

Xander Snyder - Good to be back. Nothing’s changed in the world since I’ve been gone, right?

Odeta Kushi - No, no, all is quiet… except maybe a couple of things here and there. Since we’re focusing on commercial real estate today, let’s talk about the ongoing rebalancing of the industrial market. For several years, industrial was the darling of the pandemic—there was never enough of it, and both property prices and rents surged at record rates. Now, though, the market seems to be softening.

Xander Snyder - That’s right. The industrial market is in many ways a victim of its own success. Early in the pandemic, e-commerce sales surged, driving historic demand for warehouses and logistics facilities. Developers responded by building a lot more, and industrial construction hit all-time highs in 2022. Now a wave of that new supply is coming online, much of it already available.

Mark Fleming - This is a classic example of the business cycle. Strong demand drove up prices, which spurred new supply. Eventually that supply catches up, and sometimes overshoots, leading to falling prices as the market rebalances. And the cycle begins again.

Xander Snyder - Exactly. Commercial real estate often follows these cyclical patterns over the long term.

Mark Fleming - It takes two to tango—the supply and demand tango that creates these cycles. Another Karate Kid reference, anyone?

Xander Snyder - Ha!

Odeta Kushi - My eyes are going to get tired from all the rolling. Okay, back to the regularly scheduled podcast. That dance between supply and demand isn’t always well-synchronized. Today, we’re going to look at one measure of demand that helps us understand where in the cycle we are—net absorption. It’s not a widely used term outside of real estate, so first we’ll define it, then examine recent trends to see what it tells us about industrial today.

Mark Fleming - Definitions are my job. Net absorption measures the overall change in occupied space from one period to the next. You add up all the new or existing space that’s leased, then subtract the space vacated during that period. The difference—occupied minus vacated—is net absorption. It shows how total demand for space has changed.

Xander Snyder - Right, and just to emphasize—net absorption captures both space taken and space given up. If you only looked at space leased, you’d have gross absorption. That’s useful, but it doesn’t tell the full story the way net absorption does.

Odeta Kushi - So, what stood out about industrial net absorption in the second quarter?

Mark Fleming - In Q2, industrial net absorption turned negative for the first time in 15 years—since 2010. That means more space was vacated than occupied.

Mark Fleming - That’s a long stretch. Before we get too worried about the negative number, what’s behind it?

Xander Snyder - A few things. Some tenants are cutting costs amid uncertainty around trade policy and supply chain logistics. Companies are consolidating operations, and industrial REITs have reported tenants hesitating to lock in long-term commitments because of tariff concerns.

Odeta Kushi - That makes sense. Warehouses and logistics centers are central to supply chains, and shifting trade policy affects where companies need space.

Mark Fleming - And it’s not just about how much space, but where. Real estate always comes back to location. For example, if domestic substitutes for tariffed goods become popular and are produced in the Midwest, warehouse demand might shift away from port cities and closer to production. The point is demand for industrial space can rise and fall, but it can also move to new locations to meet changing needs in those supply chains.

Odeta Kushi - Mm-hmm.

Xander Snyder - Exactly. Negative net absorption can mean less space is needed, but it can also reflect tenants relocating to newer facilities or better locations. And remember, this is happening just as that massive pandemic-era supply is hitting the market. Demand is softening, but it’s also mismatched geographically with where the newest buildings are.

Odeta Kushi - So let’s flip back to supply. A lot of new industrial space has been delivered, and while the wave is nearly over, it’s still hitting the market. Does that change how we should view the negative net absorption?

Xander Snyder - Yes. With so many new options, tenants may downsize or move to higher-quality spaces. For example, a company might leave a 75,000 square foot warehouse for a newer, more efficient 50,000 square foot one. Even if rent per square foot is higher, overall rent could be lower, while operations remain the same. That shows demand is still present, even though the net figure looks negative. That smaller, more modern warehouse lets them manage the same scale of operations that they have going on for lower rent. Even if the price per square foot is higher, the overall rent might be lower. So in that case, the demand to lease space is still present, even though the net amount of vacated space was 20,000 square feet.

Mark Fleming - Great point. Negative net absorption isn’t automatically bad—it’s more nuanced. It can reflect efficiency gains or tenant flight to quality, not just weakening demand.

Xander Snyder - Exactly. Right now, it’s both—softening demand and relocations happening simultaneously.

Mark Fleming - So, in short, industrial real estate is rebalancing. A supply-and-demand tango, after years of red-hot growth. New supply and supply chain uncertainty are driving a softer leasing environment.

Xander Snyder - Yes, and while it may take time to fill all this new space, the long-term drivers remain -- growing e-commerce, supply chain modernization, and nearshoring of manufacturing. Those fundamentals are still in place.

Odeta Kushi - So, to wrap it up. Industrial real estate is entering an adjustment period. An unprecedented amount of new supply has hit the market, demand is softening, and tenants are becoming more selective. Supply chains are shifting, and some developers are facing the consequences of building during a boom that’s now cooled. The result is a more challenging market, but the long-term demand drivers remain. Did I get that right, Xander?

Xander Snyder - Perfect summary.

Odeta Kushi - Thank you—and welcome back, Xander! Great to have you here for these conversations. And thanks to our listeners for joining us on this episode. If you want more on this topic, check out Xander’s latest blog on our Econ Center. If you have an economics-related question for us, email economics@firstam.com. And as always, you can follow us on X: I’m @OdetaKushi, Mark is @FlemingEcon, and Xander is @XanderSnyderX. Until next time.

Mark Fleming - Time for the tango lesson!

Xander Snyder - Tango—I love it.

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