March 10, 2023
Beneficiary shippers have seen a significant drop in transportation costs in recent months and expect further weakness in the future, but their warehousing costs will continue to rise.
According to developers, inventory and demand may be declining, but a significant reduction in new warehouse developments will keep vacancy rates tight and push rents up more than 10% this year. Warehouse automation is expected to drop a few notches this year, but should resume its upward trend over the next few years.
Slowing sales and rising capital costs have taken a toll on warehouse development this year, with the industry overdriven by a surge in freight volumes over the past few years, adding warehousing capacity at a frantic pace. However, by 2023, real estate giant Prologis predicts that development in the U.S. will hit a seven-year low, with construction starts falling 60% in 2022.
The firm’s analysts pointed to rapid cost increases, driven by inflation, as the biggest factor inhibiting activity, noting that many projects were also skeptical of the 2023 development as rising interest rates made immediate capital more challenging. Leasing activity should be expected to decrease by 10% to 15% but Supplemental said the absorbed area points were overtime freed up by demand which was driven primarily by e-commerce growth.
In the second half of last year, the warehousing industry showed signs of peak temperatures, led by Amazon, which hit the brakes and then turned backwards, delaying or closing warehouse projects and announcing that it would sublease facility space and offer third-party warehousing under its new warehousing and distribution brand. From the beginning of 2020 to the end of 2021, the e-commerce giant’s warehouse footprint nearly doubled.
However, the overall recession will be more pronounced in some regions than in others. Prologis expects a more intense contraction in Southern California, noting that one-third of the buildings under construction in the “Inland Empire” near Los Angeles in November were in neighborhoods where municipalities proposed or implemented a moratorium on industrial development.
Developers expect warehousing activity to grow in Texas and Mexico. The latter has been a major target for companies seeking nearshoring procurement. But a slowdown in the market won’t lower rents. According to GLP, the national vacancy rate will rise to around 4% this year from 3.3% at the end of the third quarter of last year.
Developers estimate that this may seem at odds with slowing imports and retailers’ efforts to reduce excess inventory through discounted sales, but the slower pace of development should keep capacity growth below demand levels. Prologis estimates that even if demand completely dries up, the U.S. vacancy rate will only rise to 5.9 percent this year.
With demand still outpacing capacity, Prologis expects storage rents to rise by more than 10% this year, while CBRE expects rents to rise by 12%-15%.
According to market intelligence provider Nteract Analysis, library automation is downshifting as facility development slows. The company predicts that the industry grew 28% in 2021 due to slowing e-commerce growth, with revenue climbing to $36 billion and will grow just 2% this year.
Amazonian plays a huge role in this area, and when the company stopped its pooling expansion, it caused trouble for its technology providers, with Teract’s statistics showing that as much as 35% of the pooling automation market will come from Amazon by 2021.
However, Lnteract is bullish on the long-term potential of the market and expects to rebound from the slowdown this year in the coming years. Driven by improved macroeconomic conditions and steady growth in e-commerce, the CAGR is expected to be 19% from 2024 to 2027.
Kinimatic doesn’t seem to be worried about the current slowdown in the market, a technology-driven warehousing and fulfillment network provider that announced in November that it would add more than 9 million square feet to its nationwide area, currently covering more than 30m SG ft.
Prologis also noted that warehouse starts in Europe have slowed, down 30% from their peak in Q3’22.