BuildingTeam Construction Forecast

Warehouse Starts Remain Depressed Due to Logistics

Why is warehouse construction declining when all of the other commercial building markets are booming? The answer is not to be found in warehouse investment returns, which remain excellent compared to other types of commercial properties, but in changing logistics practices that reduce space demand.

Warehouse construction starts, measured by project dollar cost, have dropped 34.1% this year through May, compared to the same period last year, according to Reed Construction Data’s monitoring of all active non-residential construction projects in the U.S. Hotel construction starts have increased 146.3%, while retail buildings rose 19.6% and office buildings increased 13.0%.

In short, the demand for warehouse space has not matched the growth in the economy. Growth of warehouse space demand has been slowing for nine months, according to Property & Portfolio Research (PPR). (PPR tracks investment conditions in commercial building markets.) According to Mike Levans, editor of Logistics Management magazine, warehouse users have found ways to use less space by increasing inventory turns or skipping warehousing altogether. U.S. businesses keep 3.1% less inventory now per dollar of monthly sales than they did a year ago. Furthermore, some large warehouse users are packing and tracking containers of imported goods so they can skip the warehousing step at congested ports. They truck or piggyback containers directly to final destinations.

The starts data clearly show this new logistics practice. The Riverside distribution complex east of Los Angeles accounted for 13% of all warehouse starts in the U.S. last year, but only a negligible share so far this year. Diversion to other ports such as Seattle, where warehouse construction has increased five-fold so far this year, has also contributed to the end of the Riverside construction boom.

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