Prologis: Texas Will Be the Top State for Warehouse Net Absorption and Other 2023 Predictions

Last year at this time the big question was – will Christmas be canceled? After more than two years of supply chain disruptions, the word “normal” is creeping into the outlook for 2023. At the same time, the larger economic environment is still impacting major supply chain players.

 We still see companies struggling with labor shortages and needing to prepare for the unexpected (moving from a “just-in-time” approach to managing their supply chain to a “just-in-case” approach). While no one has a crystal ball, we at Prologis have leveraged our company’s decades of industry experience and unique insights from our ~1.2 billion square foot global portfolio and 6,200+ customers to predict seven unconventional trends for the industrial real estate market and wider macro-economy for the new year:

Prediction #1: U.S. warehouse development starts will drop to a seven-year low, even as rent growth exceeds 10%.  Driven by a rapid rise in the cost of capital, development starts will decline by 60% to less than 175 million square feet (MSF) in 2023. A pullback of this magnitude would create a shortage of space in 2024. Low vacancy will produce another year of double-digit rent growth. With less warehouse space coming online in the near future, consumers may feel higher costs as retailers are forced to accept the dynamics of supply when chasing limited demand.  

Prediction #2: California’s barriers to development will permanently constrain logistics demand, allowing Texas to become the #1 state for net absorption. California is short on developable land, and barriers to supply are rising. By November 2022, one-third of the buildings under construction in the Inland Empire were in municipalities that had proposed or enacted local moratoriums on industrial development. Texas demand-drivers are accelerating. Population growth is expected to continue, and regionalizing supply chains will send more goods through Mexico and Texas. 

Prediction #3: Mexico demand will hit a new annual record as nearshoring drives expansion along the border. Nearshoring-related expansions made up half of new leasing in 2022. Monterrey, Juarez and Tijuana were the primary beneficiaries. Increased deliveries in 2023 will allow for more absorption because the vacancy rate is at an all-time low. 

Prediction #4: India will become the third-most-active country for development starts, behind the U.S. and China. The combination of strong demographics, increasing exports, favorable regulatory and tax policy changes and improving infrastructure have attracted capital to India, producing dry powder for logistics development. India was the fourth-most-active in 2022, more than doubling the volume of development starts in only five years and overtaking Europe’s most active development markets. 

Prediction #5: Build-to-suit rents will reach new levels in the U.S. and EU as market rents are capitalized at 5%, despite falling land and construction costs. Financial market volatility has led to markedly higher costs of capital. Construction cost softness lags economic cycles. Costs may respond eventually to the overall economic landscape, but they haven’t yet. Prologis estimates a 10-15% decline in construction costs by year-end 2023, backloaded in the second half of the year. 

Prediction #6: E-commerce leasing will bounce back to become the second-most-active year on record (after 2021). E-commerce sales are re-accelerating as the outsized desire for in-person experiences diminishes and the e-commerce value proposition for consumers remains intact. Prologis maintains our prediction that >25% of retail goods will be sold through online channels by 2025, up from 15% in 2019.  Additionally, online retailers will look to their network design to help achieve both cost savings and sustainability goals. Specifically, adding an urban hub to the end of e-fulfillment supply chains can yield cost and environmental efficiencies of 50% on average by shortening the final mile. 

Prediction #7: Demand for sustainable warehouses will grow rapidly. Installed rooftop solar capacity will double, and EV truck charging capacity will exceed 10 megawatts. Building future-proof facilities can shield logistics companies from future operational risks, including changing regulations, community resistance and volatile fossil fuel-based energy pricing. Costs for sustainable building and operations are dropping. Government incentive programs and the European energy crisis can turbocharge these longer-term trends. In California, a commission found that 157,000 rapid chargers will be needed by 2030 to support fleet electrification and achieve the state’s carbon reduction goals. (Prologis, which already invests in commercial EV infrastructure, has committed to installing 1 gigawatt of solar by 2025.)  

2023 looks to be a dynamic year for the world of logistics, with these trends unfolding throughout the year as companies look to meet ever-changing consumer demands and expectations. 

To learn more about these predictions, read the full paper here.

Chris Caton is managing director, Global Strategy and Analytics for Prologis.