U.S. warehouse development will fall to a 7-year low in 2023 as a rapid rise in capital costs curtails borrowing and subsequent construction activity, logistics warehouse giant Prologis Inc. said Thursday.
The San Francisco-based firm, the world’s largest owner, developer and operator of logistics warehouses, said an expected 60% year-over-year (y/y) decline in development starts will push rent growth above 10% in 2023. This is due to less supply hitting the market and leasing demand for e-commerce facilities rebounding strongly to notch its second-best year on record after 2021, the company said.
U.S. development starts will drop to less than 175 million square feet in 2023, Prologis (NYSE: PLD) said in a paper detailing predictions for American and international logistics warehouse markets. Quarterly warehouse starts in Europe are already down 30% from their peak, and the U.S. market will soon follow suit, according to the firm.
In the unimaginable scenario that the 365 million square feet of unleased U.S. warehouse construction in the pipeline went unabsorbed — meaning demand would fall to zero — the vacancy rate would rise to 5.9%, still below the long-term average of 6.4%.
U.S. warehouse vacancy rates in 2023 will finish at 4%, a bit higher than the record-low levels of 3.3% in 2022.
According to the forecast, California, which for 25 years has led the country in logistics warehouse demand, will relinquish the crown to Texas in 2023. California is already facing a shortage of developable land, and recent government moratoriums on industrial growth will permanently constrain logistics demand, according to the forecast.
As of last month, one-third of buildings under construction in California’s Inland Empire, the nation’s largest warehouse complex, were located in municipalities that have proposed or enacted freezes on industrial development, according to Prologis. These restrictions will raise the value of existing properties in the state and make it harder for companies that are looking to grow.
The story is different south of the border, where warehouse demand in Mexico is expected to hit an all-time record next year. A surge in nearshoring activity will whet the appetite for warehouse space, according to Prologis. Nearshoring-related expansions have accounted for half of all new leases this year. Deliveries of warehouse facilities will be absorbed quickly because Mexico’s industrial vacancy rate sits at an all-time low 1.4%.
India will move from fourth to third among countries with the most development starts, trailing only the U.S. and China, Prologis said.
After leveling off earlier this year due to higher borrowing costs, e-commerce activity is reaccelerating. E-commerce companies accounted for 17% of Prologis’ new leases in the third quarter, up from a trough of 13% in the first quarter. The data reinforces the narrative that a slowing in warehouse activity is due to the impact of higher interest rates and not a waning of tenant demand.
As parcel delivery rates remain elevated, online retailers are exploring network design concepts that can reduce fulfillment costs and achieve sustainability goals. In fact, solar warehouse demand will rapidly increase in 2023, with installed rooftop solar capacity doubling and electric truck power charges surging in volume, according to Prologis.
NOVEMBER 7-9, 2023 • CHATTANOOGA, TN • IN-PERSON EVENT
The second annual F3: Future of Freight Festival will be held in Chattanooga, “The Scenic City,” this November. F3 combines innovation and entertainment — featuring live demos, industry experts discussing freight market trends for 2024, afternoon networking events, and Grammy Award-winning musicians performing in the evenings amidst the cool Appalachian fall weather.