The industrial real-estate business was already riding high from the explosive growth of online shopping when the Covid-19 pandemic caused nationwide lockdowns in 2020. That triggered a logistics building boom to meet the needs of retailers abruptly facing supply-chain bottlenecks and an increase in e-commerce activity after many bricks and mortar stores temporarily closed.
Logistics developers completed and opened a record 148.2 million square feet of space in the third quarter, according to commercial real estate services company Cushman & Wakefield. That was about 72% more than the quarterly average over the past five years, the company said.
Now, this record amount of new warehouse supply is hitting the market just as mounting recession fears are slowing growth in demand.
In an early sign that industrial property faced a possible supply glut, online retailer Amazon.com Inc. said in the spring that it was throttling back on its e-commerce operations. Since then, Amazon has closed, delayed openings of and canceled plans for about 80 buildings in the U.S., according to MWPVL International Inc., a Canadian supply-chain consultant that tracks Amazon demand.
Other figures show that the growth in demand for warehouse space is slowing across the board. Warehouse tenants occupied about 108 million square feet more industrial space at the end of the third quarter than at its beginning, but that is down from previous quarters. They occupied 132 million square feet more of new space in the second quarter, and 159 million square feet more in the third quarter of 2021, Cushman & Wakefield said.
“You’re going to see a world where new supply starts exceeding incremental demand," said Vince Tibone, a senior analyst at real estate analytics firm Green Street. “You’ll see vacancy rates ticking higher in the coming quarters."
Analysts and investors will be watching closely on Wednesday when Prologis Inc., one of the world’s largest industrial space companies, reports its third-quarter earnings. “I’m very interested in whether they’re taking a different approach to development," said Mr. Tibone. “Are they going to start new projects in the fourth quarter or are they going to be more conservative given macro concerns?"
The shift to remote work has been weighing on office values, while the reduction in business travel since the outbreak of Covid-19 has punished urban hotel owners. But until recently, industrial properties have mostly gained strength during the pandemic.
Warehouse demand is ebbing now partly because, with the prospect of a recession looming, retailers, e-commerce firms and other tenants are rethinking expansion plans. During a recession “there’s less money in the market and less spending," said Carolyn Salzer, Cushman’s head of Americas industrial research. “People feel they don’t need to fill the warehouse as much."
Some analysts say the need for new warehouses and rents will remain at a robust level next year, even if there is a recession. Many tenants are continuing to add logistics space to develop new supply chains and expand their e-commerce businesses, which, as a rule, require three times more industrial space than bricks-and-mortar stores.
Yet as with most types of commercial real estate, industrial property values have been hard hit by higher interest rates. While they are up 30% since the beginning of the pandemic, they have fallen 19% since they reached their peak in the first quarter of this year, according to Green Street.
Shares of industrial real-estate investment trusts, meanwhile, are up 67% since the pandemic hit, but down 27% since this past spring when Amazon reported that it was reducing its rate of expansion, Green Street said.
This story has been published from a wire agency feed without modifications to the text
