With a host of economic and political questions looming, industrial tenant demand was sluggish at the year’s midpoint and is likely to remain that way as users retrench further in anticipation of presidential election results and a potential September interest rate cut.

The country’s largest industrial REITs reported lower but still healthy occupancy rates at their properties and slipping revenues in their second-quarter financial reports. It isn't cause for alarm, as they are still riding the remnants of the high that came in the pandemic’s wake, executives said, but the rest of the year is poised to be sluggish.

“They think many tenants are still prioritizing cost management right now, just due to the uncertain macroeconomic environment,” said Green Street analyst Jessica Zheng, who covers Prologis, First Industrial Realty, EastGroup Properties and Stag Industrial. “They're kind of in a wait-and-see mode.”

While most of the big industrial REITs observed second-quarter demand that was slightly better than that of the first quarter, overall tenant demand is still fairly slow, Zheng said.

Many REITs echoed that muted optimism about what the second quarter had to offer and what lies ahead in the remainder of the year.

“While overall leasing has increased since the first quarter, the tone of our conversations with customers warrants continued caution in the near term,” Prologis Chief Financial Officer Timothy Arndt told investors on the company’s Q2 earnings call.

“Even though space utilization sits at near our normal range, approximately 85%, we find that many customers simply lack urgency, still prioritizing cost containment in light of an uncertain economic and political environment, both of which will be clearer soon,” Arndt said.

Others saw different levels of urgency for different spaces.

“Bigger boxes, bigger commitments, bigger leases are just taking longer than smaller, which is natural, especially in a volatile rate environment that we have,” Stag Industrial’s Bill Crooker said on the REIT’s earnings call, adding that the dynamic hadn't materially changed since Q1.

Zheng pointed to a large amount of space that came on the market over the last couple of years as a possible factor in that slow decision-making process. Deliveries peaked at nearly 200M SF nationwide at the end of 2023 and have since dropped to just over 110M SF in the second quarter, still a bit above 2019 levels, according to a Q2 national Savills report.

EastGroup Properties, with a focus on smaller tenants and shallow-bay product, sometimes also called light industrial, deals in a type of property that isn't commonly being built among those high delivery numbers.

As a result, it is seeing more demand for its product, which is found in the Sun Belt, than those REITs that are focused on the coasts and dealing in the types of buildings that have been coming online in waves.

Many retailers are carrying less inventory than they might have been a year or two ago, “in general just due to the higher cost of carrying those right now,” Zheng said. Some of those retailers saw flat sales figures in June, and the anticipation is that retail sales will rise just 0.3% for July, according to The Wall Street Journal.

Taken together, the lack of clarity about where the economy could be headed, slower sales and high borrowing costs have created conditions that could have staying power.

Zheng said Green Street forecasts national net absorption to continue with sluggish demand perhaps through the end of the year, with slight improvements each quarter.

“All these factors combined together makes us think this could go on for just a little bit longer,” Zheng said.