How Warehouses Are Escaping Real Estate's Doom Loop, in Charts; Demand and leasing rates are no longer red-hot, but the industrial real-estate sector is proving resilient

Companies from e-commerce retailers to third-party logistics providers are leasing less new warehouse space amid weak freight demand , high interest rates and shifting consumer spending.

But the industrial real-estate market hasn't completely cooled off after three years of frenetic expansion. The amount of storage available remains historically tight, industry experts say.

The industrial market is "starting to slow," said Matt Dolly, research director of real-estate services firm Transwestern. "I'm not going to say the brakes are on, but the foot might be off the gas and maybe they're in cruise control."

Companies rushed to add hundreds of millions of square feet of warehouse space from 2020 through 2022 to meet pandemic-driven e-commerce demand. Those decisions drove the nationwide vacancy rate down to nearly 3% as of late last year, and some markets such as Southern California were effectively full .

The red-hot growth pace of the industrial property sector has contrasted with the commercial real-estate market, which has been pummeled by fading demand for office space.

The pace of industrial leasing has receded and vacancy rates are ticking up, but business remains strong by historical standards, with companies still taking enough new space to keep warehouse rents climbing .

Logistics operators leased about 205 million square feet of warehouse space in the second quarter. That was down from the 235 million square feet leased in the same period a year earlier, but still significantly higher than 135 million square feet in the second quarter of 2019, according to real-estate services firm CBRE.

Hamid Moghadam, chief executive of Prologis, the world's largest owner of industrial real estate, said there is still demand from companies looking to expand.

"Is it as great as it was in '21 and '22? No, but you know, in 40 years of doing this, those were by far the two best years" he has seen, Moghadam said. "I would say this year so far has been one of the top five."

Moghadam said some of the demand is coming from companies that are looking to hold more inventory closer to their customers after grappling with supply-chain disruptions the past few years.

"People realized they're running too lean on inventories and they're out of stock whenever something bad happens," he said. "So people are carrying a little bit more inventory in the system."

The Logistics Managers' Index, a monthly survey of supply-chain managers, showed available warehouse capacity grew in August but at a slower rate than in July.

Retailers such as Target, Sam's Club and Amazon.com have been opening more logistics facilities this year focused on speeding up e-commerce deliveries.

More warehousing space is also becoming available as companies seeking to cash in on federal subsidies for manufacturing electric vehicles, EV batteries and semiconductors build facilities across the U.S.

Broader geopolitical tensions that are driving North American companies toward nearshoring, returning production that had been done in Asia, is also driving warehouse demand. The addition of manufacturing facilities in the U.S. and Mexico is leading those companies and their logistics providers to set up distribution centers to serve the burgeoning market.

C.H. Robinson Worldwide, the largest freight broker in the U.S. by revenue, this month opened a 400,000-square-foot warehouse in Laredo, Texas, to handle the flow of goods between the U.S. and Mexico.

Manufacturers accounted for 8% of all warehouse leasing as of mid-2023, up from 6.7% a year earlier, according to CBRE.

E-commerce has been a major driver of industrial real estate demand, boosted by Amazon's rapid expansion of logistics capabilities during the pandemic. But Amazon has pared back its warehousing expansion, leaving more room for other logistics operators to build.

"We're seeing some of the smaller and midsize companies get some opportunities that they were boxed out" of by Amazon, said Transwestern's Dolly.

Warehouse rents have continued rising as companies have slowed their leasing decisions, a sign that the market remains tight, experts say.

Tight capacity is helping keep the price of industrial real estate relatively high by historical standards. Developers raced to build more industrial real estate starting in 2020 to meet demand. They've started cutting back their plans more recently amid rising borrowing costs.

About 110 million square feet of new space began construction in the second quarter, down 55% from a year earlier, according to real-estate analysis firm CoStar Group.

Larger supply-chain trends, including efforts to make distribution networks more resilient, are also bolstering demand.

Importers have shifted more shipments to East Coast and Gulf Coast ports after big containership backups at West Coast ports caused massive cargo delays during the pandemic. The diversions, triggered early in the pandemic by bottlenecks at the West Coast ports and later by the potential for labor disruptions, have eased but the impact is still reaching inland logistics markets.

The shifting import volumes have prompted developers to build logistics real estate to meet growing demand for storage in those markets, experts say.