Industrial Real Estate’s Biggest Operators Add Space Despite Slowdown

“We’re basically on trend to do similar leasing volume to what we did last year,” Petherbridge said. “It’s going to be a comparable number.”

Prologis (PLD), the San Francisco-based real estate investment trust that is the largest owner of warehouses nationally, expects a similarly sweeping performance. The company said on an earnings call at the start of the year that it planned between $3 billion and $3.5 billion in new development in 2024. It also expects its portfolio to remain more than 96 percent occupied. 

That’s due to an expected acceleration in the growth of e-commerce as a share of retail sales, Megan Creecy-Herman, president of Prologis’ West region, said in a February interview with Commercial Observer. “Look at how much industrial demand that’s going to drive in addition to the already organic demand coming off the other business sectors,” Creecy-Herman said. 

The numbers and statements fly in the face of numerous reports that the pace of industrial demand is slowing as the world transitions from the pandemic to the post-pandemic era. One of those reports, by insurance company First American, said that when compared with the double-digit growth and record low vacancy that characterized 2020 and 2021, “the sector is experiencing a softening.”

The potential capitalization rate, the price at which a buyer can expect a profit, for industrial properties had risen 1.3 percentage points between 2022 and 2023, but relative to an all-time low cap rate, First American found. Rising cap rates are an indicator of falling values. This was due to a rise in deliveries of industrial space, a response by investors to unprecedented levels of demand.

To be sure, the market for warehouse space is not going back to its pre-COVID slumber. Most experts interviewed for this story said the market is far from weak. But it remains unclear what the new normal will be.

Xander Snyder, senior commercial real estate economist for First American, described a scenario under which investors are going to need a strong stomach, and a strong balance sheet, to weather the financial uncertainty until they can prosper on the other side.

“The demand in the long term for industrial is strong,” Snyder said. “We’re going to have a lot of supply come to market in the short term and the intermediate term. But, in the long term, demand is still there for that space.”

Industrial — including warehouses, cold storage, outdoor industrial storage and distribution centers — was one category of commercial real estate that really benefited from the pandemic as consumers stayed home and ordered goods online. The rapid acceleration of already changing buying habits triggered a rush on industrial space as online merchants such as Amazon and its rivals engaged in a war to deliver goods ever faster, the so-called “last mile” delivery component critical to quickly getting a package to a buyer’s door.

There are some 19.8 billion square feet of warehouses in America, according to brokerage CBRE (CBRE). The occupancy of that space was 95.2 percent at the end of 2023, pretty high but not as high as it was in the second quarter of 2022, when it hit a record 97.1 percent. According to a CBRE source, the occupancy number is heading down. At the end of the year, there were 377.9 million square feet of warehouse space under construction and 28.3 percent of that was pre-leased.

E-commerce demand spiked in the second quarter of 2020 to a then-record 22.8 percent of total retail demand, according to CBRE. It had never been higher than 17 percent. Since then, it fell to around 21 percent, then began creeping up again until the fourth quarter of last year, when it hit 23 percent. The report said that users pulled back in 2023, citing higher interest rates, concerns about the economy going forward, and moderating consumer spending habits.

James Breeze, CBRE vice president and global head of industrial and logistics research, said those conditions don’t necessarily have to apply in 2024 or the years to come. “Some occupiers are going to come back into the market as there is more economic clarity,” he said. “We were already starting to see that happen at the end of 2023. It was a pretty solid end of the year.”

One thing that happened in the COVID and post-COVID periods is that the consumer products industry discovered the benefits of having a local supply chain rather than a global one. This bodes well for warehouses going forward, Breeze said.

“What has really driven demand is the need for more inventory domestically,” he said. “It’s difficult to rely on the global supply chain. It’s going to be hard to go back to a just-in-time inventory strategy.”

One of the biggest users of warehouse space was and remains Amazon. The global e-commerce giant has a vast 587 million-square-foot inventory, 413 million of which is in North America. This includes what Amazon calls “fulfillment centers,” data centers, and a category called “other.” These numbers are from Amazon’s latest 10-K annual earnings report.

That footprint has grown and contracted since the pandemic, according to data supplied by supply chain consultancy MWPVL International. In the three years prior to the pandemic, Amazon added 31 million, 25 million and 23 million square feet, respectively, of ground-level industrial space. It then added 103 million in 2020 and 100 million in 2021, then 35 million in 2022 and 27 million in 2023. MWPVL projected Amazon will add 42 million this year, though Marc Wulfraat, its president, said he now suspects it will most likely add only about 30 million square feet.

From the start of 2022 to mid-March, Amazon had closed 45 facilities in the U.S. totaling 7.6 million square feet, canceled another 47 totaling 31.6 million square feet, and delayed the opening of 28 totaling 25.8 million square feet, according to data supplied to Commercial Observer by MWPVL. The company also closed 66 facilities totaling 14.1 million square feet in the rest of the world, bringing the grand total of space determined to be surplus to 203 buildings totaling 92 million square feet, the consultant said.  

Wulfraat, in an email, said his firm had “many” data sources, including news stories, real estate listings and the LinkedIn social media website. 

“We can say in general that in a market affected by interest rates and high rent rates, more often than not we see companies trying to stretch their dollars,” Wulfraat said. “We’re seeing a cooling-off of the e-commerce market.”

Amazon would phrase it as a strategic maneuver. (It also disputes MWPVL’s data and how it compiles the numbers.)

“We’re always evaluating our network to make sure it fits our business needs and to improve the experience for our employees, customers and partners,” Amazon spokesman Steve Kelly said in an emailed statement. “As part of that effort, we may close older sites, enhance existing facilities, or identify new sites, and we weigh a variety of factors when deciding where to develop future sites or maintain a presence.”

The company also noted that it continues to pursue warehouse opportunities as warranted, and gave examples of newly announced leases in Roanoke, Va.; Shreveport, La.; and Burlington, Iowa.

“We are seeing healthy supply and demand fundamentals to start the year, particularly for high-quality, infill assets, and remain bullish on our sector,” said Link’s Petherbridge “Our portfolio is more than 95 percent occupied, and rents in our markets are up 7 percent year-over-year.

“Looking ahead, new construction starts are down nearly 80 percent since last year, which will further benefit the industry. Many of our customers are planning years ahead of time to secure their supply chains now, as they understand that the medium- to long-term supply outlook is only going to get tougher with less available industrial space. We are also seeing customers and capital markets start to place more emphasis on high-barrier markets with less supply and more demand. Those markets have always been and continue to be a priority for us.”