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In the ever-shifting tides of the real estate world, warehouses are emerging as the unsung heroes, navigating the turbulent waters of change with resilience and adaptability. As we delve into the intricate dance of supply, demand, and evolving market dynamics, one thing becomes crystal clear: Warehouses are far from sinking in the real estate’s doom loop. Instead, they are riding the waves of transformation with finesse, and the charts tell a compelling tale of their journey. Join us on this captivating exploration of how warehouses are not just surviving but thriving in an ever-changing landscape.
Companies spanning e-commerce giants to third-party logistics providers are showing caution when it comes to leasing new warehouse space. This trend is attributed to a combination of factors, including weak freight demand, higher interest rates, and shifts in consumer spending patterns.
However, the industrial real-estate market is not hitting the brakes just yet, despite three years of frenzied expansion. Experts in the field assert that the available storage space remains historically scarce, defying conventional expectations.
Matt Dolly, the Research Director of the real-estate services firm Transwestern, notes that the industrial market is “starting to slow” but emphasizes that it’s more akin to cruise control rather than a complete halt.
In response to the pandemic-driven surge in e-commerce demand, companies aggressively added hundreds of millions of square feet of warehouse space from 2020 through 2022. This swift decision-making process led to a nationwide vacancy rate plummeting to nearly 3% by the end of last year, with certain markets such as Southern California reaching full capacity.
The remarkable growth in the industrial property sector stands in stark contrast to the commercial real-estate market, which has been grappling with diminishing demand for office spaces.
While the pace of industrial leasing has retreated, and vacancy rates are inching up, the sector continues to perform strongly in historical terms. Companies are still securing new space, contributing to a steady climb in warehouse rents.
Logistics operators leased approximately 205 million square feet of warehouse space in the second quarter. Though this figure was lower compared to the previous year, it still significantly exceeded the pre-pandemic levels of 2019, according to real-estate services firm CBRE.
Hamid Moghadam, the CEO of Prologis, the world’s largest industrial real estate owner, acknowledges that demand isn’t as extraordinary as it was in 2021 and 2022 but underscores that this year remains among the top five in his four-decade career.
Moghadam reveals that some of the demand originates from companies seeking to maintain higher inventory levels closer to their customers, driven by supply-chain disruptions in recent years. This shift represents a strategy to prevent stockouts during adverse events.
The Logistics Managers’ Index, a monthly survey of supply-chain managers, indicates that available warehouse capacity expanded in August, albeit at a slower pace than in July.
Retail giants such as Target, Sam’s Club, and Amazon.com have been strategically opening more logistics facilities this year, primarily to expedite e-commerce deliveries.
Additionally, as companies capitalize on federal subsidies for manufacturing electric vehicles, EV batteries, and semiconductors, more warehousing space is becoming available across the United States. Geopolitical tensions are also pushing North American companies toward nearshoring, spurring the construction of manufacturing facilities in the U.S. and Mexico and consequently driving warehouse demand.
C.H. Robinson Worldwide, the largest freight broker in the U.S. by revenue, recently inaugurated a 400,000-square-foot warehouse in Laredo, Texas, designed to facilitate the flow of goods between the U.S. and Mexico.
Manufacturers have increased their presence in the warehouse leasing market, accounting for 8% of all warehouse leasing as of mid-2023, up from 6.7% a year earlier, according to CBRE data.
E-commerce has played a pivotal role in driving demand for industrial real estate, boosted by Amazon’s extensive expansion of logistics capabilities during the pandemic. However, Amazon’s retrenchment from warehousing expansion has opened doors for smaller and midsize logistics operators to seize opportunities previously monopolized by the e-commerce behemoth.
Despite a slowdown in leasing decisions, warehouse rents continue to rise, signaling a persistently tight market.
The limited capacity in the warehouse sector has contributed to sustaining relatively high prices for industrial real estate when viewed through a historical lens. Developers initially raced to construct more industrial real estate in 2020 to meet burgeoning demand, but they have been scaling back their plans as borrowing costs rise.
Approximately 110 million square feet of new warehouse space began construction in the second quarter, marking a 55% decline from the previous year, as reported by real-estate analysis firm CoStar Group.
Wider supply-chain trends, aimed at fortifying distribution networks, are further fueling demand. Importers have shifted their shipping to East Coast and Gulf Coast ports in response to cargo delays at West Coast ports during the pandemic. This diversion has prompted developers to invest in logistics real estate in these regions to accommodate the growing need for storage.
As the real estate landscape continues to shift, warehouses are proving to be adaptable and resilient, navigating uncharted waters with determination and innovation.
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