Throughout the US logistics industry, we’ve seen prices slide from their 2022 peaks, with various sectors feeling the impact. Ocean carriers and truckload operators led the way, followed by air cargo carriers, LTL providers, and even parcel rates.
Surprisingly, warehousing rates have remained immune to the market’s weakening conditions, maintaining their lofty levels. The primary reason is the sharp slowdown in the construction of new warehouse facilities.
According to the commercial real estate information firm CoStar, logistics warehouse construction starts have plunged to their lowest point since Q1 2014. This decline is a consequence of weakening demand and high-interest rates, which have discouraged developers from initiating new projects.
Even the appetite for warehouse space among 3PLs has dwindled, and net absorption has decreased in the retail sector, as noted by CoStar.
For instance, Atlanta, a logistics powerhouse in recent years, only added 6.2 million square feet of warehouse capacity over the past four quarters. This is a 70% drop from the average in the previous two years and less than half the average net absorption rate Atlanta experienced over the past five years.
Prologis, the leading warehouse developer in North America, felt the impact of this slowdown but managed to surpass market expectations in its Q3 results. Despite revenue rising from $1.15 billion a year ago to $1.78 billion, which included revenue from the acquisition of Duke Realty, the company’s adjusted net earnings declined by 26.6% to $765 million.
Prologis CEO Hamid Moghadam commented, ‘Our results reflect strong execution by our team and the quality of our portfolio. That said, until there is more stability in the economy, negative customer sentiment will weigh on demand.’
The company’s occupancy rate fell to 97.1%, a decrease of 60 basis points compared to a year ago, and new leases for warehouse space contracted by 9% year-on-year, totaling 46.4 million square feet.
CoStar predicts that the full impact of the drop in new construction won’t be felt until late next year. While most ongoing projects will be completed, many of them faced delays due to shortages of building components, leading to their launch during the hot market conditions of the past year when construction starts reached their highest level in three decades.
In a recent report on global trends, Prologis anticipates that new building deliveries in the US and Europe will contract by 35% or more in 2024. Despite this, the report presents a positive outlook for warehouse developers and providers. It notes a re-acceleration in e-commerce, customers’ efforts to build resilience against ongoing disruptions, and increasing demand from diversified sourcing and new trade routes.
However, the growth in warehouse capacity will be limited due to an established developer and investor base, along with rising geographical and regulatory barriers. Given these factors and the slow momentum in new construction, it is likely that warehousing rates will continue to remain high.
