Investors are backing away from industrial assets amid rising interest rates, leading to a slowdown in the fervent demand that typified the sector over the past two years.

Federal Reserve interest rate hikes, alongside an increase in the U.S. Department of Treasury bond yields to 3.25%, have spooked foreign investors and institutional capital away from the industrial asset class. Investors have instead shifted their attention to Treasurys, Noyack Capital Partners principal and Chief Investment Officer C.J. Follini told WealthManagement.Com.

“Now that trade is unwinding ... they are rapidly divesting of the same industrial assets to reallocate capital to Treasuries, thus flooding the marketplace with for-sale assets — we are seeing 10 large industrial deals per week,” Follini told the website.

Overbuilding concerns have been growing in recent weeks. Commercial real estate analytics firm Green Street recently predicted that U.S. industrial developers were on track to overbuild 90M SF more a year than will be leased by companies, leading to occupancy dropping to 94% over the next three years.

Despite $35.4B in industrial sales volume in Q2 2022, the number of industrial transactions actually dipped by 24% year-over-year, according to WealthManagement.com, utilizing data from real estate data firm MSCI Real Assets.

The unprecedented amount of capital poured into the asset class during the early days of the coronavirus pandemic skewed industrial prices artificially high, which is now giving pause to longtime players in the segment, according to Follini.

 “Demand hasn’t changed—it still is outpacing supply, but what changed is the supply of capital and the investors,” he said.