Expert: Don't Worry About the Pause in Warehouse Construction
The drop in construction starts indicates a healthy market responding quickly to slowing demand and higher capital costs
Recent months have seen warehouse construction starts fall sharply. But that’s not a reason to worry – only a sign that the market is rebalancing in a healthy way.
“The pause in development expected in 2024 is likely just what the doctor ordered,” according to Craig Hurvitz, director of Colliers’ national industrial research team, commenting in a blog post.
Mid-2023 saw total space under construction peak at 638 million SF, then fall 17% to 546 million SF in the third quarter, Colliers’ data shows. The fourth quarter should see completions peak at 180 million SF – then dive 71% to 53 million SF by 4Q 2024.
“The drop in construction starts is indicative of a healthy market responding quickly and appropriately to slowing demand and higher costs of capital,” Hurwitz commented. Though vacancy is rising as new supply comes online and is expected to hit 6.5% by 2024, “that is considered a functional and balanced vacancy rate where industrial users have multiple options to choose from, yet the market isn’t oversupplied.”
Though industrial demand may moderate from pandemic levels, Hurvitz predicted it will remain robust because of the requirements of e-commerce, third-party logistics providers, onshored manufacturing, cold-storage expansion and data centers. The slowdown may give developers more time to gauge demand for new products and the best time to resume construction activities after a two-year period when demand for warehouses spiraled to new heights.
“Demand was so impressive that net absorption – a demand indicator that measures the net change in occupancy – totaled 598 million SF nationwide in 2021, more than twice the previous record of 290 million SF recorded during a particularly strong year in 2016. Last year wasn’t far behind with an annual total of 493 million SF,” Hurvitz noted. Vacancies fell to 3.5% nationwide and to just 1% in the Inland Empire.
Higher interest rates and economic uncertainty have contributed to the normalizing of demand in the first three quarters of 2023. Net absorption has fallen to more normal levels, averaging 60 million SF in this period. “While the industrial market is being temporarily overbuilt, the good news is that it won’t last,” Hurvitz commented.