Top Industrial Activity in a Transforming Market

The national industrial sector noted a supply increase throughout the last few years, leading to a vacancy rate of 7.1% in Q2 2025. Absorption levels have struggled to adjust to the oversupply, and potential tariffs could further impact the segment. However, new trends have begun to appear, which could aid stabilization moving forward.

Data Center Boom

Rising demand for AI production across the country has led to the rapid expansion of data center facilities. Due to this increase in demand, AI companies contributed to more than 50% of the growth in U.S. data centers in 2024. Some recent operators that leased data centers include Equinix, Aligned Data Centers, DataBank, and Vantage Data Centers. Now, competition is on the rise, and giants like Microsoft, Meta, and Google are expanding their data center operations nationwide. With this growth, the data center construction market is forecast to reach $112.33 billion by 2030.

Doc Perrier, Vice President and Director, noted Houston as a top performer for data center additions. “With significant investments from companies like Apple and Nvidia, there’s a surge in demand for high-performance computing hardware and AI server components,” Perrier stated.

Apple’s entrance into Houston includes an upcoming 250,000-square-foot facility that is set to produce in-house AI servers, aligning with the broader trend of tech-driven manufacturing. To continue Houston’s standing as a powerhouse for data centers, Perrier stated that Texas Tax Code 313 and the availability of low-cost power will aid new data center developments.

Benefits to Track

Data center owners will see a variety of benefits when taking on a property. According to Vice President Andrew Wiesemann, “owners benefit from stable long-term income from credit tenants, as well as high barriers of entry, due to regulatory and zoning constraints.” Owners will also find the longer leases for these facilities enticing as terms range from 3 to 10 years, creating stability with the tenant.

Data centers are capital-intensive, with costs based on megawatt pricing, charging tenants based on power usage. “You need the right power, the right fiber, and the right team to
get them [data centers] off the ground,” Vice President Nick Watson said, “but if you can check those boxes, they’re a rock-solid play.”

From where I sit, they’re quickly becoming the backbone of our digital economy,” Nick Watson, Vice President.

IOS Update

The IOS segment has recorded a strong rise in additions as institutional investors have shifted focus to this property type. “New developments all over the country have begun, due to evolving tenant requirements,” Wiesemann noted. “I expect to see more portfolios being sold or recapitalized throughout this year as well.” Notable IOS acquisition activity occurred in the first half of 2025, with Texas standing out as a prominent location for IOS growth. In January, Alterra IOS acquired four properties in Dallas-Fort Worth that total 34.9 acres; then in May, it acquired two sites in Austin and San Antonio that total 8.7 acres. Texas metros are favorable locations for IOS, due to population growth and the state’s convenient central location.

One ongoing trend that First Vice President and Senior Director Chris Nelson noted is the varying performance in IOS properties depending on square footage. Nelson stated that the owner-user exit isn’t as available on larger sites, meaning owners have to lease and trade as a leased investment in order to get out of the project. “The basis of many of these initial acquisitions and, in turn, the lease rates needed to make the projects make sense are objectively high, although achievable,” Nelson explained.

When negotiating for an IOS property, owners must ensure they are finding an adequate price. “The IOS space still has strong demand, but for the right price,” Associate Market Leader Carter Hadley said. Moving forward, areas to watch are well-located IOS sites with high barriers to entry as these will continue to outperform, according to Vice President Jacob Friedman.

Small IOS is very hot, while large IOS is a mixed bag,” Chris Nelson, FVP & Senior Director.

Shifts in Demand

Across the country, industrial construction has transitioned to smaller facilities under 50,000 square feet. The new focus on these properties is largely due to the oversupply of facilities over 100,000 square feet, which saw an influx in deliveries over the past couple years. Owners and tenants are now prioritizing smaller spaces as they offer many advantages.

Due to the influx of larger properties, smaller industrial facilities noted less supply availability. However, tight vacancies for properties with less square footage allow for the ability to securely keep tenants on short-term leases without vacancy fears. “This allows for continued rent increases, which will match rent growth in strong areas and inflation in general,” Watson stated.

Certain markets are already seeing this transition in their industrial segments. Chris Nelson noted this trend increased in Southern California, specifically for small-bay, multi-tenant facilities. “Southern California continues to remove industrial product from the market in favor of multifamily redevelopment, and the small-bay segment continues to be a main target for that,” Nelson said. “Generally, many of the business parks are in infill areas and have total scale that makes sense to be able to build a residential project of enough density to pencil.”

Nelson added that as more rooftops are built in infill areas, there will be more demand for small industrial properties to house the tenants that provide goods and services to them. “Look forward to continued strong rent growth in this product segment in the years to come,” Nelson emphasized.

Texas Activity

In Houston, Doc Perrier noted he expects to see continued rent growth for properties under 100,000 square feet, as well as an interest in crane-served buildings. “We are seeing an increase of manufacturing tenants in the market, and due to the lack of development over the past 10 years of crane buildings, vacancy is around 2.5 percent,” Perrier said. Most of the crane-served buildings in demand are in the 20,000 to 70,000 square foot range.

As such, Perrier stated that tenant requirements for manufacturing facilities surged nearly 300% in the first half of 2024 compared to 2020. “This uptick in demand is driven by companies seeking to onshore production and capitalize on Houston’s port proximity and strong infrastructure,” Perrier explained. “Houston’s industrial market is transitioning from a phase of oversupply to a more balanced state.”

Demand for strategically located, mid-sized facilities remains strong,” Doc Perrier, FVP & Director.

Industrial Predictions

The institutionalization of the segment is one factor that will aid activity in years to come. “Institutional capital is now flowing into specialized industrial segments, such as small-bay properties, IOS, and Class B/C assets under $5 million in high-performing markets,” Watson said. “This trend is expected to persist as these niches gain broader recognition for their stability and long-term upside.”

Vice President Spencer Mason also stated that as industrial construction slows down from the COVID-19 development surge, the lull will create positive effects in most major and secondary markets moving forward. “This includes stronger absorption, declining vacancy rates, increased leasing activity, and continued rent growth,” Mason expressed. Additionally, Mason added that as key unknowns, like tariff policies, begin to stabilize, the segment can expect a resurgence in activity. “Investment groups will be more willing to re-engage, and developers will be poised to break ground on new projects as market fundamentals continue to strengthen,” Mason said.

Looking Ahead

Investors should ensure they are aware of ongoing shifts and how they can impact investments. While there will always be changes in the sector, industrial remains ready for growth.