Prologis is predicting that U.S. warehouse development starts will drop to a 7-year low, as rent growth exceeds 10%.
Starts are already 30% below their peak in Europe and Prologis expects that to continue in the US. The warehouse property owner says the rapid rise in the cost of capital is the culprit and starts will fall by 60% to less than 175 million square feet in 2023.
“A pullback of this magnitude would create a shortage of space in 2024,” according to Prologis’ report. “The pipeline will drop from over 500 million square feet in Q3 2022 to 275 by year-end 2023.”
However, low vacancy will produce another year of double-digit rent growth.
“Even if new demand fell to zero, the national vacancy rate would increase by just 260 bps to 5.9%, well below the long-term average,” the firm said.
Adam Roth, executive vice president of industrial services at NAI Hiffman and director of NAI Global Logistics, agreed.
“The combination of higher capital cost and record construction pricing will greatly reduce the development of speculative industrial space,” Roth said. “I see a bigger drop off in 2024 as projects already started will be delivered in 2023. Fewer starts will occur in 2023 resulting in less deliveries in 2024.”
Sustainability Warehouse Development Could Pick Up
Prologis did forecast favorably for sustainable warehouse development.
Installed warehouse rooftop solar capacity will double, and EV truck charging capacity will exceed 10 megawatts, the firm said.
Prologis argues that building future-proof facilities can shield logistics companies from future operational risks, including changing regulations, community resistance and volatile fossil fuel-based energy pricing.
Roth disagreed to some extent.
“I do see ESG and the focus on sustainability growing, however I believe the actual implementation to be more muted and take more time,” he said. “Development costs will remain high and constrained in 2023 including the power grid as well as the equipment to expand power.”
Prologis said that costs for sustainable building and operations are dropping, and government incentive programs and the European energy crisis have the power to turbocharge these longer-term trends.
In Europe, cities with low-emission transportation zones comprise more than 60% of logistics markets as of 2022, up from less than 25% in 2015, according to the report.
Prologis Research leveraged decades of industry experience and proprietary data, as well as unique insights from its approximately 1.2 billion square feet global portfolio and 6,200 customers, to predict non-pandemic trends for 2023.
Strong Demand Will Continue
Jerry Sullivan, principal, DarwinPW Realty/CORFAC International, tells GlobeSt.com that demand will continue to be strong in 2023. And while completed lease transactions are down from 2021, demand will remain high due to the lack of product.
However, new development will slow next year, especially the first half of the year.
“We will likely see developer-controlled sites offered as build to suit opportunities and depending on the amount of interest may entice developers back to spec development sooner than anticipated,” Sullivan said.
“Due to the continued demand and the lack of readily available product lease rates will continue to increase as will annual escalations.”
Sullivan also predicted that e-commerce would increase in 2023, “but we feel that will also see an increase in manufacturing facilities as well.”
Source: “Prologis Predicts Significant Drop in Warehouse Development“