Slowing Warehouse Construction Could Extend Squeeze on Space
Developers are paring back their building plans amid rising interest rates
Construction of new warehouses is slowing as developers grapple with rising interest rates and declining leasing activity, potentially prolonging an ongoing shortfall in logistics space.
U.S. industrial construction starts fell 24% in the fourth quarter of 2022 compared with the same period a year earlier, according to data from real-estate analysis firm CoStar Group Inc. Developers began building about 137 million square feet of new warehouse space, the lowest amount of new space to start construction in a quarter since the beginning of the Covid-19 pandemic.
Adrian Ponsen, national director of U.S. industrial market analytics at CoStar, said the average time it takes large industrial projects to complete construction is about 13 months, so current decisions on whether to break ground on developments will have an impact next year.
“By the spring, summer of 2024, there are going to be a lot fewer new warehouses completing construction every month,” Mr. Ponsen said. “That could put us in a position where the vacancy rates are falling again and the space shortages are coming right back.”
The slowdown in new construction is a sharp shift from the frenzied pace of warehouse expansion during the pandemic, when companies leased record-high amounts of space to respond to a surge in e-commerce orders and drove vacancy rates to multiyear lows. Retailers more recently have slowed their leasing as the pandemic-driven surge in online shopping has receded and consumers grapple with inflation.
E-commerce giant Amazon.com Inc., which had doubled the size of its fulfillment network in 24 months as business surged during the pandemic, last year began slowing its logistics expansion and said it would sublease some of its warehouses.
Companies signed leases for 132 million square feet in the fourth quarter of 2022, down 28.2% compared with the third quarter and a drop of 37.2% from the previous year, according to commercial real-estate services firm Cushman & Wakefield.
Warehousing space remained tight in the fourth quarter, although the national average vacancy rate ticked up to 3.3% from 3.1% the prior quarter, according to Cushman & Wakefield. That was the second straight quarter vacancy increased after two years of shrinking availability, though the rate remains far below the 5% average vacancy rate in 2020.
Mr. Ponsen said developers have begun pulling back on construction starts amid rising building and financing costs and pressure on property values.
“Developers’ profit margins are basically coming under pressure from both sides,” Mr. Ponsen said. “At the same time that the hard costs to build these warehouses is rising, the prices that developers think they can ultimately sell them for is beginning to decline.”
Prologis Inc., the world’s largest builder of logistics properties, has curtailed its development plans for this year. The company is planning development starts for the year to range between $2.5 billion and $3 billion, down from $4.7 billion in construction starts last year.
Hamid Moghadam, chief executive of Prologis, said the developer is waiting to see how quickly new space is leased before launching new projects.
“Why go out there and put a bunch of space on the market if you have an option of being more cautious and metering it in as you see the year unfolding?” Mr. Moghadam said.
Even with construction starts slowing, the pipeline of industrial projects being built remained elevated at 682.6 million square feet as of the fourth quarter, according to Cushman & Wakefield.
Developers completed 143.6 million square feet of new space to finish the year, the company said, down from the record-high 148.2 million square feet delivered in the third quarter.
