Developers are on the brink of overbuilding industrial logistics space

Industrial developers are unleashing nearly 700 million sixths of warehouses across the country after two years of record uptake as Amazon and other retailers expand their distribution networks.

But experts say a potential recession and a rapid slowdown in online sales growth could mean developers are in danger of outstripping demand.

Developers continue to create new repositories as some experts have raised concerns about a possible sharp drop in demand.

Commercial real estate research and consulting company green street US developers are expected to likely build 90 million sixths per year more than will be leased by companies, reducing occupancy by a full point to 94% over the next three years.

“Our new supply forecast indicates that we believe supply will outpace demand in the future,” Vince Tibbonsaid the chief retail and industry analyst at Green Street During a webinar on July 14. “In certain markets, we’re seeing some of the best demand and rent growth for the newer big box space, but that’s also where the most supply comes in.”

Said one of the main developers bisno The potential for over-construction is real.

“We are concerned about the overall supply,” said Stan ConwayExecutive Vice President of Majestic Real Estate Company. , a family-owned commercial real estate company with more than 80 million sixths in projects under its belt and one of the most active industrial developers in the United States.

“Once I’ve worked in this field over the years, it seems to me that there are a lot more products on the way compared to historical demands,” said Conway, whose company has 11 million square feet of distribution space in development across the country. “We are definitely keeping a close eye on new beginnings.”

So far, industrial oversupply concerns have not been substantiated in the fundamental data.

In the first half of 2022, developers delivered 194 million SF, According to a Q2 Cushman & Wakefield report. But 236M SF was absorbed in that time, and the lease exceeded construction for seven consecutive quarters. Last year was a record for warehouse owners, who watched businesses gobble up more than 490 million feet across the United States, an 81% increase from 2020, According to JLL. This helped push warehouse vacancies to a historic low of 3.8%. Landlords also reaped the benefits from rents, with the rate rising to $8.36 per sixth in the second quarter, the first time that average warehouse rents have exceeded $8 per sixth in more than 20 years as Cushman and Wakefield tracked that data.

These fundamentals have fueled a development boom in this sector. In the second quarter of this year, the construction pipeline for warehouses and distribution centers reached 699 million sixths, up 112% from pre-pandemic levels and 177% above the 10-year average, according to Cushman & Wakefield.

But cracks are starting to appear in the strong demand for online shopping and the general economy, which has some analysts predicting a slowdown.

Tibbon said Green Street has lowered its forecast for the amount of industrial leasing based on e-commerce from 30% to 40% of total uptake annually to 15% to 20%.

“What we expect about e-commerce-related demand is much lower than what we saw even before the pandemic,” he said.

David Rodgers, senior REIT research analyst at Robert W. Baird & Co., said: , he expects uptake to return to historical standards of about 200 million feet per year, especially with what is expected to be a “severe recession” this year, slowing consumer demand.

“If we keep building 600M SF to 700M SF, we are building a lot,” he said.

The pandemic has sent online sales up, but growth is waning. E-commerce sales grew 50% from 2019 to 2020 and 14% from 2020 to 2021. That has fallen further so far this year, with online sales reaching $231 billion in the first three months of 2022, an increase of 6.7% over the same period In 2021 I mentioned digital commerce 360Quoted from the United States Ministry of Commerce data.

In April, Americans spent $5.28 billion less online than in March.

in May, Amazon He pulled the rug out from under what seemed to be an insatiable demand for global distribution space when Bloomberg reported that she planned To cut back on new warehouse leasing and attempt to sub-leasing more than 30 million sixths across the US at its leasing peak in 2020, Amazon accounted for 30% of net industrial uptake in the US, according to data from Green Street. That number was low but still big last year when the online retail giant accounted for 15% of net uptake.

The news had a seemingly frightening effect on the industry REIT shareswith yields shrinking more than 20% since May compared to a 9% drop in returns with the S&P 500 as a whole, according to Green Street.

Many economists assert that the Federal Reserve raise interest rates Trying to fight inflation will Push the United States into recession this year. Consumers have held out on spending, but some of the increase in e-commerce sales in the past quarter can be attributed to higher prices due to inflation, Digital Commerce 360 ​​reports.

Even if e-commerce companies slow their pace in industrial leasing, some experts say these cumulative clouds will not lead to a storm.

He said the activity among potential tenants is widespread beyond just e-commerce uses, including food distributors and home improvement companies. Greg PoehlerDirector general Bridge Logistics Characteristics‘ Eastern Province. In addition, companies are already claiming a portion of the ongoing space in the United States.

Cushman & Wakefield analysts said 26% of the ongoing space is pre-leased.

“Given how tight the industrial market is, it’s hard to get concerned about an over-building scenario,” Cushman & Wakefield’s Caroline Salzer Jason Price wrote in a report. “Even if all speculative products immediately hit the market as vacant, the national vacancy rate would rise to 6.3%—a segment that is moving away from its historical average of 6%.”

Companies signed more than 408 million sixths of leases during the first half of 2022, putting this metric on track to surpass 800 million sixths by the end of the year, the second time the lease will reach this level, according to Cushman & Wakefield. Although Amazon has declined, companies like LouieAnd the targetingAnd the United States Postal Service And the Weaverin addition to third-party logistics companies, continued to enter into new leases, with more than 15 deals signed in the second quarter across the country that exceeded the sixth million, according to the report.

“We should expect e-commerce to slow down a bit. We are clearly going back to something that is a new standard and coming back in person. We are not ordering via the 5.5M SF pipeline for new industrial development across the country this year,” said Boler. Internet only.

Manufacturers also select leasing activity, transform warehouses into factories and other facilities, chris Senior Vice President Adam Burgess said. When market speed is important, manufacturers will take an existing warehouse and convert it to suit their needs versus building from scratch.

“I’m sitting in Detroit, and this is the first time in my career that we’ve seen a shift in institutional money moving to market,” Burgess said. “If you look at the rent mix, I’d bet a greater percentage of manufacturers are moving into those buildings than distributors.”

Rodgers also said that despite new warehouse deliveries so far, the vacancy rate has continued to decline, indicative of pent-up demand.

“When you look back, the data seems pretty supportive. In a shorter period of time, we’ve seen a huge acceleration in the need for warehouse space. The truth is we don’t really know. [if there is overbuilding]. We know we are in a great position with regards to the vacancy.