What to expect for the balance of 2026

Summer 2026 is over. As the last tent was collapsed at the International Street Fair over the weekend, fall signaled its return, albeit with high temperatures, humidity and a bit of rain. Hurricanes in the Pacific will do that, but I digress.
 
Other than Christmas decorations in our local home improvement stores, what can we expect in our industrial real estate market for the final months of 2026?
 
Allow me to forecast.
 
Vacancy will remain elevated, but the worst may be behind us.

Depending upon whose statistics you follow, Orange County industrial vacancy ended the second quarter somewhere in the mid-5% to upper-6% range. One major brokerage firm pegged vacancy at 5.5%, its highest level in 20 years. Other surveys calculate it somewhat differently.
More important than the precise number is the direction.
 
After several years of companies shedding excess space, leases expiring and newly constructed buildings searching for occupants, we are beginning to see signs of stabilization. Industry reports show positive absorption for the third consecutive quarter in Q2.
 
I expect that trend to continue through year-end. Vacancy may bounce around, but I don’t anticipate another dramatic increase.
 
Lease rates will find a floor.

Average asking rents have fallen considerably from their late-2023 peak. Recent market reports place average asking rents around $1.49 per square foot, triple net, compared with $1.80 at the peak. Other surveys place the current average slightly lower at $1.46.
 
That correction was necessary.

For several years, occupants renewing leases faced enormous increases. Today, they have choices. Landlords are competing again, concessions have returned and tenants willing to commit can negotiate.
 
My prediction? Asking rates remain relatively flat through the balance of 2026, but effective rents, after free rent and tenant improvements are considered, will continue to favor occupants.
 
Large buildings will continue to struggle more than small ones.

This is really several industrial markets masquerading as one.
 
Recent market data indicates that buildings between 5,000 and 10,000 square feet had vacancy below 2% in the second quarter. Buildings between 100,000 and 250,000 square feet had vacancy exceeding 14%.
 
That is an enormous difference.

Small owner-user buildings remain scarce. Large distribution facilities have considerably more competition. Expect that disparity to continue.
 
Construction will virtually disappear.

Only a fraction of the industrial space that was under construction a couple of years ago remains in the pipeline. Recent market reports counted just 676,000 square feet underway at midyear, down almost 66% from a year earlier.
 
With land prices, construction costs, interest rates and existing availability where they are, speculative development is difficult to justify.

That lack of new construction will eventually matter. Demand doesn’t have to explode for vacancy to tighten when very little new inventory is being added.
 
Owner-user sales will remain frustrated by financing.

Here is the wildcard.

Companies still want to own their buildings. Many simply dislike the monthly payment created by today’s borrowing costs. Meanwhile, owners who bought years ago at much lower prices and interest rates have little incentive to sell.
 
Consequently, good owner-user buildings should continue to command attention, but transactions will take longer and buyers will scrutinize pricing more carefully.
 
The Federal Reserve provides little clarity. Policymakers enter their September meeting divided over whether rates should remain unchanged or move higher, with inflation data likely determining the outcome. 
 
Finally, 2027 decisions will begin early.

This may be the biggest story of the fourth quarter.
 
Companies with leases expiring in 2027 and 2028 should be evaluating alternatives now. For the first time in several years, occupants have leverage. Waiting until 90 days before expiration wastes it.
 
So, my forecast for the balance of 2026?

More balance. More negotiation. Fewer cranes. Motivated landlords. Selective buyers. And considerably more opportunity for occupants willing to make decisions before everyone else does.
 
Oh, and Christmas decorations appearing sometime after Labor Day.
 
Apparently, some forecasts are easier than others.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.