REAL ESTATE NEWS

The commercial real estate logistics performance story continues to bifurcate between large logistics properties serving regional and national supply chains versus small bay properties serving local communities.

This is further accentuated in California, which has borne the brunt of tariff impacts on port-centric logistics properties, due to its overexposure to Asian trade lanes.

Some markets have fared better, as these are slightly buffered from global trade relative to markets such as the Inland Empire. Sacramento (12.2%) and San Jose (2.0%) are the only markets with positive rent growth, with occupancy increasing.

“However, a softer construction pipeline has not yet resulted in a recovery in rents, as tenant demand for large properties has remained sluggish, further extending the supply overhang across almost all geographies,” according to Juan Arias, national director, U.S. industrial analytics, CoStar Group.

While containerized import activity, a significant driver of large logistics property demand, surged in the second half of 2024 and through the summer of 2025, according to CoStar, imports have not seen much growth in the last few years.

Retailers shifting supply chains away from China and caution around building up inventories have dragged on goods imports, presenting a headwind for logistics space demand, Arias said.

“Pricing and high-frequency container import data indicate a soft second half of 2025 for port import activity,” Arias said.

This softening growth in imports has significantly impacted West Coast ports, such as Los Angeles-Long Beach and Oakland, as these are most exposed to goods from China and Southeast Asia.

Despite a volatile import picture in the past few months, this has not led to a recovery in demand for logistics space, according to Arias.

In fact, large and new logistics properties (over 100,000 square feet, built between 2000 and 2023) are experiencing availability rates rising above 12%. While this analysis includes properties in Seattle, the major California port markets are also being impacted.

For large properties in the 15 major California markets, over half continue to see declining rents and occupancies in large logistics properties. Much higher than at any time in recent history, when only between 20% to 30% of these markets saw similar weakness.

“Relief may be on the horizon as construction activity has come down significantly, specifically for large properties,” according to Arias.

Under-Construction Square Footage Peaked in 2022

Under-construction square footage peaked at around 70 million in 2022 and has since dropped to just over 20 million across the largest 15 California logistics markets, based on total square footage. In contrast, smaller properties less than 100,000 square feet (typically referred to as small bay) have seen "relatively minimal new construction.”

Now, more than 80% of these major markets are seeing annual declines in under-construction activity for large properties, except for East Bay and Ventura. Therefore, new supply is becoming less of a concern across nearly all California markets, according to CoStar’s September 2025 California Logistics Market Performance Report.

However, that has not prevented availability rates from continuing to rise, specifically for bigger properties, which now stand at nearly 14%, well above the 7% for small-bays.

This has been driven by the fact that leasing activity (a leading indicator for demand) for these larger properties has remained 20% or so below recent highs reached in 2021 and has fallen since the second half of 2024, now standing 25% below 2021 highs. In contrast, small bay leasing activity has remained healthier, with a decline of just around 10% below 2021 highs.

In terms of total square footage, today marks the highest level of industrial availability tracked in these 15 markets since 2007, with approximately 20% of the space being subleased, as tenants have been returning to consolidate or rethink their space needs.

A significant portion of this demand readjustment has been driven by 3PLs and e-commerce firms, which overexpanded during the pandemic and have continued to experience softer demand for goods since 2023, resulting in a downsizing of logistics space needs.

Glut of Sublease Space

The historically elevated availability of sublease space poses a significant headwind to rent gains in California, as this space typically rents at a discount to direct space listings. That disparity has widened significantly over the last few years.

The higher availability of new space coming to the market, combined with softer demand from the aforementioned tenants, has created a surplus of sublease space availability in addition to direct space. Space for sublease is now available with asking triple net lease (NNN) rents at a 25% discount to direct space, the highest cost reduction in years.

While diminishing construction activity presents a tailwind to an eventual recovery in rent gains, tenant demand is the metric to watch, Arias said.

“If leasing activity does not recover for large logistics occupiers, the supply overhang of existing and incoming space will remain with us for longer,” he said.

“This will keep availability rates from contracting significantly despite waning new supply additions, with sublease space further dragging on rent gains.”

Source: GlobeSt/ALM