For most of the past three years, industrial real estate had a simple math problem. Developers built too much, too fast, and tenants couldn’t absorb it all. The only question was how high vacancy would climb.

That question now has an answer. According to Savills’ State of the U.S. Industrial Market report for Q3 2026, net absorption outpaced new deliveries by 7.0% through the first three quarters of the year. National vacancy has slipped to 8.0%, down 20 basis points from its 8.2% peak. And leasing totaled 543.7 million square feet across Q2 and Q3, the strongest two-quarter stretch Savills has on record.

Q3 alone saw 80 million square feet of net absorption, more than double the 38.9 msf posted a year earlier. Sublease availability, usually an early warning sign, is down 13.6% year over year after peaking at a record 196.5 msf. By most measures, the market has turned a corner.

But look past the national averages and the picture gets more complicated. The recovery is uneven by building size, by quality and by geography. And rising interest rates threaten to cool it before it fully takes hold.

A new kind of tenant

The tenant mix says a lot about where this cycle is headed. Among the largest deals Savills tracked over the past four quarters, logistics firms and 3PLs accounted for 37% of leasing. Manufacturers were close behind at 27%. E-commerce, the engine of the pandemic boom, took just 10%.

Online retail hasn’t stalled. E-commerce penetration hit a new record in Q2, up 80 bps from a year earlier. But the marginal tenant looks different now. Savills counted 78,117 jobs announced in large U.S. manufacturing projects over the trailing 12 months, up 46.6% year over year, with announced capital investment more than doubling to $69.5 billion. Just as important, the share of announced jobs tied to stalled or canceled projects has dropped to 11.3%, after spiking above 70% around the start of 2025.

Defense is adding fuel. Aerospace and defense venture funding is on pace for $51.1 billion this year, 186% above its five-year average. Companies like Anduril, Hadrian and Saronic are raising billions to build physical things, and physical things need factories and warehouses.

Then there is the data center supply chain. Savills highlights a string of big-box leases signed by companies that cool, power and equip data centers. Stellar Energy Americas, a Trane subsidiary making modular cooling gear, took 1.15 msf in Dallas-Fort Worth. Google signed two Atlanta leases totaling roughly 1.5 msf.

Our read: Houston is the quiet winner of this trend. Five of the 12 data center-related leases in Savills’ list landed there, adding up to about 3 million square feet. That’s the city’s energy-equipment expertise being repurposed for the AI power trade. The catch is that this demand rides on a development boom facing its own headwinds. Savills notes that 40% of data center projects slated for 2026 completion risk delays of three months or more, and 16 states have considered bans or moratoriums. Landlords leasing to its suppliers take on secondhand exposure to those risks.

A two-speed market

National averages hide a market that is splitting along three lines.

Size. Vacancy in buildings of 750,000 square feet and up fell 130 bps over the past year to 6.5%, making big-box the tightest segment in the country. Vacancy in 50,000 to 200,000 sf buildings rose 60 bps to 8.6%. That flips the conventional wisdom of the last cycle, when small-bay was considered the scarce, safe corner of the market. The tenants driving this recovery, from consolidating 3PLs to new manufacturing plants, want scale. Small-bay depends more on small businesses, which tend to feel higher borrowing costs first.

Quality. Class A vacancy, which swelled during the delivery wave, has been falling all year. Class B and C space, meanwhile, has logged 13 consecutive quarters of net occupancy losses. Office owners will recognize this flight to quality, and its warning: older buildings may not get pulled along.

Geography. Nine markets are now leasing at 90% or more of their prior peak, up from just one a year ago. Dallas-Fort Worth leads at 130% of its 10-year peak. By our math, DFW absorbed 18% of the nation’s net absorption this year (35.7 msf) while holding only about 5% of its inventory. Columbus cut vacancy by 210 bps, the most of any major market.

The West Coast is the outlier. Its rents are down 20.9% from their 2023 peak, and Seattle/Puget Sound posted the largest vacancy increase among major markets, up 260 bps to 12.7%. Overbuilding is part of the story, but so is trade. West Coast ports handled 55% of top-nine port volume in 2016; today it’s roughly an even split with the East and Gulf Coasts. The Northwest Seaport Alliance’s volume is down 31.9% since 2019. When the cargo moves, the warehouse demand follows.

Austin offers a cautionary note in the other direction. Leasing there is running at 117% of its prior peak, yet vacancy sits at 16.1%, the highest among the major markets Savills charts. With 11.8 msf under construction, roughly 9% of existing inventory by our calculation, even record demand can’t outrun that much supply.

Rents are rising, just not in real terms

The national asking rent reached $9.79 per square foot in Q3, up 2.5% from a year ago. But inflation hit 3.6% in September, which means industrial rents fell roughly 1% in real terms over the past year.

The growth that does exist is concentrated in lower-cost markets. Washington, DC led with 13.2% annual rent growth, followed by Columbus at 12.0% and Dallas-Fort Worth at 11.0%. The pricey coastal markets moved the other way, with the Inland Empire down 11.6%, Orange County down 9.7% and Los Angeles down 7.7%.

Concessions tell a similar story. On large warehouse leases, free rent has averaged 4.8 months in 2026, up 81.6% since 2022, according to CompStak data in the Savills report. That figure has finally flattened, but effective rents still lag well behind face rents.

The less-discussed number is escalations. Average annual rent bumps have eased from a peak near 3.8% in 2023 to 3.5% today. With inflation now running at 3.6%, even a brand-new lease is barely keeping pace. Owners holding leases signed in 2018 through 2020, when escalations averaged about 2.7%, are watching their real income erode every year those leases stay in place.

Capital is back, with a thin cushion

Investors have noticed the turn. Warehouse sales reached $93.3 billion through Q3, the strongest first nine months on record, edging out 2021’s $92.9 billion. Refinancings hit a record $86.9 billion over the four quarters ending in Q2. Industrial prices remain 24.9% above where they were five years ago, and the sector’s CMBS delinquency rate sits at just 1.1%, compared with 12.2% for office.

The number that should give buyers pause is the spread. Savills reports that the gap between top-quartile warehouse cap rates and the 10-year Treasury is 120 bps below its 10-year average. Investors are paying up for the recovery story while leaving little room for error.

Put that next to the rent data and the bet becomes clear. Buyers are underwriting future rent growth to justify thin spreads at a moment when real rents are falling. If the 10-year keeps climbing with inflation, something has to give: cap rates expand, or rent growth has to accelerate quickly. Record refinancing volume suggests many owners see the risk and are locking in debt while they can.

The next supply test

The biggest risk to this recovery may be the recovery itself. Construction starts reached 79.4 msf in Q3, pushing the national pipeline to 321.6 msf, up 10.2% from a year earlier. Savills found speculative construction rising in three out of four markets, led by Columbus (up 7.7 msf) and Houston (up 6.6 msf).

At this year’s absorption pace, that pipeline equals about 15 months of demand by our math. That is manageable nationally, but the build-up is concentrated in the markets with the best leasing stories. Columbus, with some of the country’s fastest rent growth, now has 13.7 msf underway, about 4.4% of its inventory and more than twice the national ratio.

Higher rates may impose the discipline developers won’t. SOFR has turned back up, and Savills suggests build-to-suit projects, now 22.4% of the pipeline, may become more common as speculative development gets harder to finance.

The industrial market solved its oversupply problem by outrunning it. The question heading into 2027 is whether it can avoid recreating that problem. Demand is real and broadening, from 3PLs and factories to defense contractors and data center suppliers. But money is getting more expensive, real rents are slipping and the spread cushion is thin. The owners best positioned for what comes next hold large, modern buildings in markets where leasing is surging and pipelines stayed in check. Everyone else is still waiting for the recovery to reach them.

The post Industrial’s Demand Caught Up. Now Comes the Hard Part. appeared first on Propmodo.

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