In this episode of the REconomy Podcast™, Senior Commercial Real Estate Economist Xander Snyder and Chief Economist Mark Fleming trace the full arc of industrial cap rates since the pandemic: from record lows driven by e-commerce demand, through a sharp reset as interest rates soared, to the cap rate plateau that exists today. They examine how cap rates have converged across major metros and why previously premium West Coast markets, particularly Los Angeles, have moved closer to the middle. While the national trend suggests balance, local dynamics reveal a more nuanced story shaped by both supply and demand.

Don’t miss a single REconomy episode, subscribe today.

Listen to the REconomy Podcast™ Episode 139:

“During the industrial boom, investors accepted lower cap rates in certain markets, especially in Southern California, because of perceived scarcity and long-term demand expectations that were perhaps a bit too optimistic. But that premium has narrowed. Now, cap rates across the largest industrial markets have mainly moved closer to the middle than they were at that trough back in 2022.” – Xander Snyder, senior commercial economist at First American

Transcript: 

Xander Snyder - Hello and welcome to episode 139 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I'm Xander Snyder, senior commercial real estate economist at First American, and with me today is Mark Fleming, chief economist at First American. Hey Mark.

Mark Fleming - Hey Xander. Good to see you again. Since you're here, I'm going to make what economists like to call a not-too-risky assumption. What do we have on the commercial agenda today?

Xander Snyder - We're talking commercial today, specifically industrial cap rates. Over the last half decade, industrial cap rates have been on quite a ride. They fell to record lows during the pandemic, then reset higher and now appear to be stabilizing, at least at the national level.

Mark Fleming - A roller coaster indeed, from decline to a rate-driven reset and now a plateau.

Xander Snyder - Exactly. We'll break this into three parts: where cap rates are nationally, how they've shifted across major metros, and why West Coast markets have moved back toward the middle.

Mark Fleming - At a national level, industrial cap rates appear to have stabilized. What's interesting is how we got here.

Xander Snyder - They declined to record lows in early 2022 due to strong pandemic demand for goods and supply disruptions. Then they rose as interest rates increased and fundamentals normalized. Since early 2024, they've been roughly flat in the low 6 percent range.

Mark Fleming - That suggests the major repricing phase is largely behind us. Stability has finally arrived.

Xander Snyder - I think so. And one way to judge how stable cap rates are is with First American's Potential Cap Rate model, or PCR for short, which estimates what industrial cap rates should be based on market fundamentals. When the PCR is below observed cap rates, it suggests that there's room for cap rates to decline, and vice versa.

Mark Fleming - You know, we economists do love our "not too hot, not too cold, but just right," otherwise known as natural or star measures. So, this is like our version of an estimate of the natural, market-supported cap rate.

Xander Snyder - Exactly. That's right. And, right now, our industrial PCR is right around 6%, relatively close to observed cap rates in the fourth quarter, which were 6.2%.

Mark Fleming - 0.2 percentage points is probably within the model margin of error in terms of the gap between actual and natural. And that suggests that cap rates are broadly supported by the fundamentals rather than still needing to adjust to them. So not too hot or cold, but just right, at least for now.

Xander Snyder - Just right, exactly. And if you look at the underlying drivers of the industrial PCR, which are vacancy rates, construction starts, and e-commerce share of total retail sales, they've also been relatively stable over the past several quarters. So, in other words, the market has moved from a rapid adjustment and price-resetting period to one that's largely in balance.

Mark Fleming - So, these stable fundamentals would seem to imply less volatility going forward, although that could change, I suppose, if there was some other kind of shock.

Xander Snyder - If there were some other kind of shock, yeah, that's right. If energy prices, for example, stayed elevated long enough to eat into other areas of spending, that could impact the demand for warehouse space. And, since we really just don't know what the likely duration of those elevated energy prices will be at this point, we're just sticking with the most likely path right now, which is relatively flat with maybe some modest cap rate movement, but nothing like the large reset that we saw several years ago.

Mark Fleming - Hence the plateau situation that we're in right now, which in this context is a good thing, right?

Xander Snyder - Yeah, exactly. And think of it this way: you kind of need to get to the top of a hill, a flat-top one, before you can begin to roll back down. In the context of cap rates, declines are usually considered good news, at least for existing owners.

Mark Fleming - So, we do expect at some point, somewhere in the future, for cap rates to roll back down that hill a little bit, hopefully, right?

Xander Snyder - Hopefully so. Yeah, got to reach stability first. And now the market's normalizing. I think that's probably coming. But I think the next big story that's worth talking about is the metro-level variations in industrial cap rates and how that's shifted over the last several years. And the metro-level story is really one of convergence. So, compared to when national industrial cap rates troughed, when they reached their lowest point, cap rates across the top 10 largest metros have become more tightly clustered than they were.

Mark Fleming - So, to use an economics term, there's less dispersion across cities. And for those watching the video version of this, here's a chart Xander published in a recent blog post showing where industrial cap rates currently are, where they were one year ago, and where they were at the trough across the 10 largest cities. As you can see, they were more spread out at the trough and now have clustered more towards the middle.

Xander Snyder - Exactly. During the industrial boom, investors accepted lower cap rates in certain markets, especially in Southern California, because of perceived scarcity and long-term demand expectations that were perhaps a bit too optimistic. But that premium has narrowed. Now, cap rates across the largest industrial markets have mainly moved closer to the middle than they were at that trough back in 2022.

Mark Fleming - So those extremes have moved back to the middle. But the clearest example of that is Los Angeles.

Xander Snyder - That's right. Both Los Angeles and the Inland Empire, which is just east of Los Angeles, are the clearest examples of that mean reversion among the top 10 largest industrial markets. They used to sit in a low cap-rate tier all their own, below all other markets. Today, they're at levels much more on par with Dallas and Atlanta. So relatively low, but no longer exceptional like they were at the trough.

Mark Fleming - And even within Southern California, the gap between LA and the Inland Empire nearby has closed, right?

Xander Snyder - Exactly. The Inland Empire's trough cap rate was below 3%, lower than LA's, which was just a little above 4%, still very low. Now, though, they're both about the same.

Mark Fleming - I mean, a 3% cap rate, that's pretty impressive. But, are there any exceptions to this broader convergence story?

Xander Snyder - Yes, it's worth noting that in the Midwest, Detroit and Chicago both had trough cap rates that were higher than the rest. And now, they're still at the highest end of this cap rate range. So, convergence has occurred, but it's not universal across all of the largest markets.

Mark Fleming - I mean, this gets back to the idea that real estate is local, right? So going forward, the story is less about a national repricing and more about the relative values across all of these different markets.

Xander Snyder - Exactly, smaller, more incremental shifts rather than those big moves we just saw.

Mark Fleming -  Okay, that brings us to a key question: why did the West Coast premium fade? What happened?

Xander Snyder - Yeah, the story behind what drove the mean reversion in both of these Southern California markets is actually a fairly interesting one, because they mean-reverted for different reasons. During the boom, the dominant narrative was that LA industrial was structurally different because of infill scarcity.

Mark Fleming - Okay, a quick definition for our listeners. There's only so much land, so you can't build much more space, aka infill scarcity. Economists and their fancy terms. I just have to clarify.

Xander Snyder - Right, exactly. You don't have a flat plateau expanding out forever where you can build. That's the idea of infill scarcity. But what the last two years showed us is that land scarcity isn't the same as being insulated from the broader risk of oversupply.

Mark Fleming - Was that an insulation joke, Xander?

Xander Snyder - Construction material pun, is that a new low for REconomy?

Mark Fleming - It might be, but you know, it's warming on me. Get it? Insulation warming. But let's just move on. If you can't build new space, how does oversupply even happen?

Xander Snyder - Warming, yeah, I get it. But if you have to explain it. Right. Well, in Los Angeles, the market didn't soften because land scarcity disappeared, but because demand weakened enough to overwhelm that scarcity.

Mark Fleming - Yes, a good old-fashioned shift in the demand curve relative to supply. And what data tells that story exactly? How can we be so sure that that's what happened?

Xander Snyder - Well, in Los Angeles, net absorption was negative through 2023 and 2024. And sublease space expanded significantly as tenants gave space back to the market.

Mark Fleming - That is definitely quite different from the national industrial story, which has mostly been about a supply overhang from record construction.

Xander Snyder - It sure is. In fact, net deliveries in Los Angeles were only about 3.9 million square feet, which was equivalent to about 0.4% of LA's industrial inventory at the beginning of 2023. So this was overwhelmingly a demand-side shift, not a supply-side one.

Mark Fleming - Yeah, 0.4%, that is a drop in the proverbial bucket. So, what drove the decline in leasing demand? Why did that curve shift?

Xander Snyder - Right. Well, first, there's a reset in trade and inventories. In 2020 and 2021, e-commerce demand surged and supply chains were disrupted at the same time. The ports of Los Angeles and Long Beach, which jointly handle about one third of all inbound U.S. shipping, really became central to that story. Retailers increased inventory to avoid stockouts, and that pushed industrial demand higher. But, by 2023, port volumes fell, just as demand for goods softened; consumers began to shift spending back toward services. So, warehouses were full and companies began to de-stock.

Mark Fleming - So, the emergency retail conditions of 2021 and 2022, I remember the pictures from the pandemic, they eased faster than many had expected. And this occurred alongside a broader decline in demand for goods as well.

Xander Snyder - Exactly. Occupiers that had over-leased in 2021-2022 began right-sizing, downsizing, subleasing space, and often choosing not to renew. So, when port activity picked back up in 2024, many tenants found that they could make do with the space they already had, or even less.

Mark Fleming - So available space rose, not because of new construction, but because existing tenants gave it all back.

Xander Snyder - Exactly. And that effectively bypassed the land constraint that everyone kind of assumed would buoy the Los Angeles market for the foreseeable future. So, as vacancy rose, rents declined, though they remained above pre-pandemic levels. And that also made tenants more selective. It wasn't super cheap still.

Mark Fleming - Okay, so that seems like a good place to bring it back to the Inland Empire, which, as you stated earlier, faced a very different set of constraints.

Xander Snyder - Yes. The Inland Empire is much further from the ports. And, as you can imagine, inland quite a ways, there's a lot more room to build out there. And building did happen there in greater quantities during the boom.

Mark Fleming - Lots more, I've seen it. So how much more, exactly?

Xander Snyder - So, over 2023 and 2024, the Inland Empire delivered about 56 million square feet of new industrial space, which is equivalent to about 7.7% of its industrial stock at the beginning of 2023. Remember, in LA that figure was only 0.4%. And to compare it to the national figure, it was 4.9%.

Mark Fleming - So, there is no infill scarcity problem in the Inland Empire, it would seem.

Xander Snyder - Exactly. But unlike Los Angeles, net absorption in the Inland Empire actually remained positive throughout 2023 and 2024, at about 12 million square feet. In LA, by comparison, net absorption was negative over that period, at about 31 million square feet in total.

Mark Fleming - So, clearly no negative shift in the demand curve like we saw in LA. In fact, maybe even a positive shift. That negative net absorption in LA means more space was vacated by tenants than was leased. And positive in the Inland Empire means that more was leased than vacated, which suggests that some demand didn't disappear; it just relocated.

Xander Snyder - Markets like the Inland Empire became a release valve. Lower rents, more availability, and they were good enough for many users. The story wasn't that tenants no longer needed Southern California space; it's just that they no longer needed to pay any price for that LA infill space.

Mark Fleming - Okay, so if you had to rank the drivers of softening in the LA market, what would they be?

Xander Snyder - So, I think, first, there's the over-expansion followed by right-sizing and growth in sublease space. Second, there's the trade and inventory reset. When it finally normalized, a lot of occupiers found they could make do with the space they had. Third, rent levels really overshot the willingness of a lot of tenants to pay. And then, of course, there was supply timing, and finally that substitution effect to lower-cost markets.

Mark Fleming - Interesting, particularly that last one, the substitute. Always be on the lookout for the close-but-cheaper substitute, right? But I think instead of one dominant driver, it's a combination of several forces all hitting at once, as you described. More like The Breakfast Club, where everyone plays a role, rather than Top Gun, where it's all about Maverick.

Xander Snyder - There's that '80s reference. Breakfast Club versus Top Gun. I like it. Snuck it right in at the end there.

Mark Fleming - I have my job to do. But did you really think I'd simply let this episode go without a movie reference? Although I do seem to be on a bit of a movie-versus-music kick at the moment. So did you ever play your guitar on the MTV?

Xander Snyder - Ha, the ‘Dire Straits’ you must be in to get that particular music reference. You know, I once appeared on a podcast about monetary inflation and we titled it "Money for Nothing."

Mark Fleming - Yes! So true. I think we better stop!

Xander Snyder - Yeah, okay. All right. We've done the movie references. We've done the music references. '80s covered. To bring it all together: industrial cap rates have stabilized at the national level. Across metros, cap rates have converged. And underneath that convergence is a supply story in many places, including the Inland Empire, but a demand story in Los Angeles. Mark, always great chatting with you.

Mark Fleming - Xander, you as well. '80s simpatico.

Xander Snyder - Thank you for joining us on this episode of the REconomy Podcast. If you have an economics-related question that you'd like us to feature in the future, you can email us at economics@firstam.com. And as always, if you can't wait for the next episode, you can subscribe to our Econ Center at firstam.com/economics or connect with us on LinkedIn. Until next time.

Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2026 by First American Financial Corporation. All rights reserved.

This transcript has been edited for clarity.