Interest Rates? Sure. But Other Factors Impact Industrial Real Estate Market Growth

By Dov Hertz

The industrial real estate sector, like the overall real estate market, is closely tied to interest rate movements. When borrowing costs rise, development slows, acquisitions become costlier, and investor appetite can wane. Conversely, when interest rates decline, capital becomes more accessible, fueling growth in logistics hubs, warehouses, and distribution centers. Yet, as we head into 2025, it is increasingly clear that while interest rates remain a crucial factor, they are not the sole driver of industrial real estate market growth.

According to CBRE’s U.S. Real Estate Market Outlook 2025, the Federal Reserve’s reluctance to pursue aggressive rate cuts means that investors must contend with a higher-for-longer interest rate environment. This, however, does not necessarily equate to stagnation. Instead, other economic and operational shifts, including supply chain reconfiguration, technological innovation, and shifting tenant demands, are playing an outsized role in shaping the trajectory of the industrial real estate sector.

A Higher-For-Longer Rate Environment

After a series of interest rate hikes aimed at curbing inflation, the Fed has adopted a more cautious stance on monetary policy. While we experienced some cuts in 2024, rates did not drop as much as many investors had hoped, and persistently strong economic data has led officials to signal that further reductions may be slow to materialize. CBRE’s analysis suggests that while elevated borrowing costs may temper investment activity, demand for high-quality logistics space remains robust.

As The Wall Street Journal recently noted, “Investors are looking beyond interest rates and focusing on asset quality and tenant stability as key drivers of long-term returns.”

As a result, well-located industrial properties with strong tenant commitments and modern amenities remain attractive investment opportunities even in a high-rate environment.

Supply Chain Evolution and Market Demand

One of the most significant factors driving industrial real estate growth is the restructuring of global supply chains. The COVID-19 pandemic exposed vulnerabilities in extended supply networks, leading many companies to adopt a more regionalized approach to logistics. The push for nearshoring and reshoring has spurred increased demand for industrial facilities in key U.S. logistics hubs, particularly near ports, border crossings, and major transportation corridors.

CBRE’s report highlights that cities such as Houston, Louisville, Kansas City, and Raleigh-Durham are emerging as critical logistics nodes. The New York Times has echoed this trend, reporting that as supply chain resilience takes precedence, companies are expanding their footprints into emerging markets to mitigate risks associated with coastal hubs and major metropolitan congestion.”

Technology’s Transformational Role

As highlighted in Mecalux’s Logistics Trends for 2025, technological innovation is revolutionizing industrial real estate in ways that transcend interest rate fluctuations. Automation, robotics, and data-driven supply chain management have become essential to maintaining efficiency, reducing operational costs, and enhancing speed to market.

Key technological advancements include:

  • Digital Twins: These virtual models allow logistics companies to simulate and optimize warehouse operations before implementing physical changes, improving decision-making and reducing inefficiencies.
  • Autonomous Mobile Robots (AMRs): These robots navigate warehouses independently, adapting to layout changes and fluctuating demand without requiring extensive reconfiguration.
  • Machine Learning: Predictive analytics help businesses better forecast inventory needs, reducing stockouts and overages while maximizing warehouse space utilization.
  • Cloud-Based Supply Chain Management: Real-time inventory tracking, enhanced visibility, and seamless supplier coordination improve overall logistics efficiency.

As companies integrate these technologies, they are demanding industrial facilities designed to accommodate advanced automation. This has fueled the development of high-tech warehouses featuring taller clear heights, enhanced power capacity, and flexible layouts that support robotic fulfillment systems.

The E-Commerce Factor

E-commerce remains a major driver of industrial real estate expansion. CBRE projects that online sales will account for 25% of total retail sales by the end of 2025, up from 23.2% in late 2024. This ongoing shift is increasing demand for distribution centers near major metropolitan areas, where same-day and next-day delivery capabilities are critical.

Retailers and third-party logistics (3PL) providers continue to seek properties that can support high-volume fulfillment operations. “Speed and efficiency are paramount,” notes CBRE’s report. “Occupiers are willing to pay a premium for locations that shorten delivery times and reduce last-mile transportation costs.”

Flight to Quality: The Shift in Leasing Trends

While overall leasing activity remains strong, there is a noticeable shift toward higher-quality facilities. Many tenants are prioritizing state-of-the-art warehouses with advanced infrastructure, sustainability features and built-in automation capabilities. Older, less efficient buildings face increasing challenges in securing long-term leases unless they undergo significant modernization.

For landlords, this trend presents three key options:

  • Hold and Wait – Retaining properties in anticipation of tightening supply conditions in 2026.
  • Invest in Upgrades – Retrofitting older properties with competitive features such as enhanced HVAC, LED lighting, and automation integration.
  • Disposition Strategy – Selling older assets, particularly to owner-occupiers who prioritize cost-effective space over modern amenities.

Sustainability and Green Logistics

Environmental considerations are increasingly influencing industrial real estate development. Regulatory mandates and corporate ESG commitments are pushing for greener warehouses equipped with energy-efficient systems, solar panels, and electric vehicle (EV) infrastructure.

Companies that proactively invest in sustainable infrastructure are not only meeting regulatory demands but also gaining a competitive edge in attracting eco-conscious tenants and investors.

Looking Ahead: Beyond Interest Rates

While interest rates remain a crucial component of industrial real estate economics, they are only part of a much broader equation. Supply chain evolution, technological advancements, e-commerce expansion, and sustainability imperatives are driving long-term demand for industrial properties.

Even as the Fed maintains a measured approach to rate adjustments, industrial real estate continues to demonstrate resilience and adaptability. Investors, developers, and occupiers who align their strategies with these broader market dynamics will be best positioned to capitalize on the next phase of industrial growth..