Inflation could clip warehouse industry growth
Since the beginning of the pandemic, warehouse owners have been able to expand their footprint and raise their rates, thanks to soaring e-commerce demand and a dearth of warehouse space in many U.S. markets.
But that growth is facing headwinds, including a slowdown in consumer spending and rapid inflation, which could test the resiliency of the business, industry watchers say.
“If the consumer stops spending because of high gas and food prices, that reduction in demand means that there are going to be less goods coming into warehouses,” said Joseph Ori, executive managing director of Paramount Capital, a real estate investment, finance and advisory firm in Walnut Creek, Calif. “It may not lead to a crash, but we’re not going to see the big rent increases that we’ve seen recently.”
The slowdown in demand is compounded by an uptick in warehouse construction that may spoil the favorable conditions. But others argue that a crash is far away, if it comes at all.
“In terms of vacancies and rental growth, we are in unprecedented times,” said Hamid Moghadam, CEO and chair of Prologis, a real estate investment trust that owns 1 billion square feet of warehouses and other industrial space globally.
In California, New Jersey, New York and other states where Prologis operates, market rates are about 55 percent higher than what the trust is charging its tenants, he said. Consequently, the company can negotiate higher rates when those tenants renew leases or vacate space.
“Consumption is pretty resilient to economic cycles,” Moghadam said, “and almost everything that goes through our warehouses would be considered a basic necessity.”
Prologis, which says it has less than 4 percent of its space available, recently announced that it would acquire Duke Realty, an industrial real estate investment trust, for $26 billion in an effort to expand.
Warehouse rent has grown an average of nearly 3 percent a quarter nationally since mid-2020, reaching $9.56 per square
foot in the second quarter of 2022, according to Newmark, a commercial real estate brokerage firm. In a handful of markets, including Silicon Valley, Los Angeles and Long Island, N.Y., rents exceed $15 per square foot.
Surging online purchases at retailers have fueled a good part of that growth. E-commerce sales expanded 30 percent in 2020 to $782 billion, and they rose an additional 23 percent in 2021 to $960 billion, according to the Census Bureau.
But consumer spending has slowed this year, growing a mere 0.3 percent in the second quarter. And e-commerce sales as a percentage of all retail purchases slipped to 13.9 percent in the second quarter this year, according to the Census Bureau. That was down from a high of 16.4 percent in the second quarter of 2020, according to Green Street, a commercial real estate research firm.
The most recent reading on online shopping was only 3 percentage
points higher than before the pandemic and suggests that e-commerce penetration is closer to maturity than originally thought, said Cedrik Lachance, director of research for Green Street. The firm recently forecast that e-commerce would grow around 7 percent per year, down from an estimate of nearly 13 percent it made in fall 2020.
In addition to lowering its e-commerce growth expectations, Green Street also tempered its outlook for growth in warehouse rent, Lachance said.
“The industrial business has risen very far and very fast in recent years, and it clearly benefited from the pandemic as we all became addicts of online shopping,” he said. “But as normalcy returned and consumer behavior changed again over the last 12 months or so, you can tell that ecommerce growth is just not going to be at the same pace as what we would have expected.”
Prologis has a more optimistic outlook. In
May, the company cited convenience for consumers, improving supply chains and closures of physical stores to support its prediction that e-commerce would grab 25 percent or more of all retail sales by 2025.
Even now, experts say, retailers and other tenants are hunting for scarce
space after abandoning “just in time” methods that kept inventories slim. Now they are pursuing a “just in case” strategy to significantly fatten inventories and avoid the type of shortages experienced during the pandemic.
But in some cases, that newer strategy has backfired, and retailers now have too much stuff.