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January 16 2023

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14 Journal of Commerce | J anuar y 16, 2023 Cover Story 10 percent year over year in 2023, according to Prologis. Stockpiles still rising Warehousing costs are still rising because demand exceeds supply. Warehousing space tightened across the US as imports soared during 2021 and 2022, especially when many US importers pulled imports forward from the second half to the first half of 2022. That surge in goods pulled down the national average warehouse vacancy rate from about 5 percent in 2020 to about 3 percent this year. Prologis and industrial developer JLL put the US average industrial vacancy rate at the end of the third quarter at 3.3 percent. Prologis expects the average vacancy rate to climb to 4 percent by the end of 2023, but that's still below the long-term average of 6.4 percent. Even if demand fell to nothing, the resultant vacancy rate would be 5.9 percent, Prologis said in its report. That tightness will keep pressure on warehousing rates, even as devel- opers race to finish projects in their pipelines and a slowing US economy saps some consumer demand for goods. A survey by developer CBRE in November found that 64 percent of respondents plan to expand their warehousing footprint, with 47 percent planning to increase their space by more than 10 percent. That reflects an emerging ware- housing market that is more com- plex operationally and diverse in the size and nature of facilities and their location across the US. Prologis also predicts more warehousing and distribution devel- opment will shift from Southern California, where towns and cities are restricting development in an already overcrowded market, to Texas. By November, one-third of the buildings under construction in California's Inland Empire were in communities with proposed or existing moratoriums on industrial development, the company said. "Regionalizing supply chains will send more goods through Mexico and Texas," said Prologis. JOC email: twitter: @willbcassidy new projects will be put on hold. Industrial real estate developer Prologis expects new warehousing starts — construction projects begun in a given period — to drop 60 percent year over year in 2023. In a report released in December, Prol- ogis said total new starts should fall to fewer than 175 million combined square feet in 2023, the lowest level since 2015, when new starts totaled 155 million square feet. New starts have exceeded 400 million square feet in each of the past two years, according to Prologis. The company's latest predictions support earlier forecasts for a tight- ening warehousing market in 2023. "We've already seen quarterly starts fall 30 percent from their peak in Europe and expect a similar pattern in the US," Prologis said. A pullback to 175 million square feet would create a shortage of space in 2024, putting more strain on supply chains and adding to storage distribution costs, even as US shippers claw back some of the transportation cost increases of the past three years. Warehousing rents are expected to rise by more than US SHIPPERS WILL enjoy reduced transportation costs in 2023, but they shouldn't expect relief on the warehousing side of the supply chain ledger. That's because warehousing capacity is predicted to get tighter as 2023 progresses, not more abundant, despite the substantial number of distribution and warehousing con- struction projects now under way and ešorts to reduce inventories. The key problem will be capital costs for construction projects — i.e., the one-oš expenses related to the acquisition, construction, or improvement of fixed assets such as land or buildings. Those costs, financed by third-party investors such as banks, are rising under pres- sure from US interest rates and infla- tion. Financing has become harder to find. That's a problem well beyond the supply chain. The same issue ašect- ing the warehousing and distribution market is also cutting into new resi- dential construction in the housing market, for example. The increase in capital costs joins rising inventory carrying costs in squeezing the ware- house end of the supply chain. US storage costs rose 19.9 per- cent year over year in 2021, accord- ing to the Council of Supply Chain Management Professionals' 2022 State of Logistics report. In compar- ison, total inventory carrying costs rose 25.9 percent, higher than the 21.7 percent increase in transporta- tion costs. "As the [US] Federal Reserve con- tinues its rate hikes to curb inflation, the capital markets have responded with overwhelming caution until there is clarity on when the Fed will stop and where interest rates are likely to settle," commercial real estate investment firm Marcus & Millichap said in a December report on capital markets. That means more Logistics real estate developer Prologis expects new warehousing starts to drop 60•percent in 2023. "We've already seen quarterly starts fall 30 percent from their peak in Europe and expect a similar pattern in the US." Slowing starts US warehousing constraints to tighten in 2023: developers By William B. Cassidy

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