Warehouse market’s big test

Continued growth in sector could be stunted by consumer spending, more construction

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 slower 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, California. “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 and other states where Prologis operates, market rates are about 55% higher than what Prologis is charging its tenants, he said. Consequently, the company can negotiate higher rates when those tenants renew leases or vacate space.

Prologis, which says it has less than 4% of its space available, recently announced it would acquire Duke Realty, an industrial real estate investment trust, for $26 billion .

Warehouse rent has grown an average of nearly 3% 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, New York, rents exceed $15 per square foot.

Surging online purchases at retailers have fueled a good part of that growth. E-commerce sales expanded 30% in 2020 to $782 billion, and they rose an additional 23% in 2021 to $960 billion, according to the Census Bureau.

But consumer spending has slowed this year, growing a mere 0.3% in the second quarter. And e-commerce sales as a percentage of all retail purchases slipped to 13.9% in the second quarter this year, according to the Census Bureau. That was down from a high of 16.4% in the second quarter of 2020, according to Green Street, a commercial real estate research firm.

But 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. In the spring, Target reported excess apparel, kitchen appliances, televisions and outdoor furniture after it failed to anticipate the extent of slowing demand for certain goods once federal stimulus spending stopped. Stumbles at Target and other retailers have been a boon for liquidation warehouses.

KELSEY MCCLELLAN/THE NEW YORK TIMES A warehouse goes up this month in Hayward, Calif. Warehouse rents in Silicon Valley have soared.