Trade war is back on: time to check warehousing markets

U.S. warehousing markets don’t have much slack to absorb tariff pull-forward, having just recovered from the last round of China tariffs. Los Angeles has a vacancy rate around 2 percent and Savannah has a vacancy rate around 1 percent. 

Last year, Trump administration tariffs against imports from Canada, Europe and China caused supply chain disruptions that distorted the magnitude and seasonal patterns of international freight flows. Demand peaked and troughed at unexpected times and the uncertainty had a tendency to inflate prices for transportation capacity, whether by ship, airplane, truck or rail.

One of the ancillary effects of the trade disruption was an unprecedented level of net absorption, throughput, utilization rates and rent growth in warehousing or industrial real estate markets. Warehouses operated well above the 85 percent utilization rate considered optimal by Prologis, at times approaching 88 percent on a national average basis, and trending even higher in major warehousing markets outside of Los Angeles, Chicago and Savannah. That meant warehouses were congested and could not efficiently handle goods.

Yesterday, August 1, President Trump announced the imposition of an additional round of 10 percent tariffs on $300 billion of Chinese imports, mostly consumer goods including apparel, electronics and household goods.

What follows is a check-up on the health of warehouse real estate markets prior to the President’s latest tariff announcement. It is likely that any significant pull-forward will send warehouses back into overdrive, resulting in higher rents, congestion, a renewed search for square footage in secondary markets, and additional construction of capacity.

Major industrial real estate owners, operators and service companies have released projections for continuing strength in U.S. warehousing markets through the rest of the year, though keep in mind these projections were released just before the new tariff announcement. Prologis and Cushman & Wakefield both stated that while warehousing space demand growth has moderated to healthy levels (from an unsustainable 2018 pace), rents will rise and net absorption will keep vacancy rates near historic lows.

Prologis released its latest quarterly Industrial Business Indicator (IBI) report, which was followed by Cushman & Wakefield’s second quarter MarketBeat for U.S. Industrial.

“Looking back, volatile trade policies pulled forward some demand into 2018, causing the IBI activity index and utilization rate to surge,” Prologis wrote. “In the first half of 2019, the data suggest a return to normal demand growth, with the IBI activity index at around 60 and the utilization rate steadying in the 85 to 86 percent range.”

The utilization rate tracks how much space is being used in an individual facility – about 85 percent is an optimal balance between throughput and efficiency. Utilization rates reached nearly 88 percent in the last run-up, meaning that warehouses were congested and the movement of goods slowed. 

Prologis calculates its IBI by asking it customers how the current flow of goods through their facilities looks relative to last month and how their use of space is changing.

Melinda McLaughlin, Prologis head of research, spoke to FreightWaves by telephone.

“To-date in 2019 we have had a little bit of the dissipation of inventory stocking activities and a more typical pace of economic growth relative to the rest of the cycle,” McLaughlin said. “It’s a return to normal, after the flurry of activity in leasing and inventory build up. Customers went from over-stuffing and rushing to get goods through facilities to something that has returned to more of a healthy expansion, making us optimistic about growth in the year.”

McLaughlin said Prologis expects rent growth of 6 percent in 2019 compared to 8 percent last year and that overall demand for newly constructed warehousing space would reach about 250 million square feet. 

“The pace of [rent] growth is slowing in locations with a high level of spec[ulative building], as the list of available options has expanded,” Prologies wrote. “In markets with little new supply, potential users continue to bid up rents to secure the best space.”

John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.