Warehouse starts down, construction spending will slow

Warehouse construction spending was 11% higher in October compared to the same period last year, but spending increases in 2007-08 will only be enough to offset project cost increases.

During 2007-08, warehouse space needs generated from the expected 2.5-3% economic growth rate can be largely met by improvements in logistics management. Growth in warehouse construction spending is forecast to taper off to 9% in 2007 and 6% in 2008.

The number of buildings in the pipeline is being drained by a recent plunge in warehouse starts. According to Reed Construction Data, the value of starts fell 43% last year through November compared to the same period last year. The decline in starts was largely a return to more normal development activity in national distribution markets following a 2004-05 surge that resulted from a rapidly growing economy after three years of weak economic growth.

The unplanned inventory accumulation in 2006 will pass quickly, so warehouse operators will begin to see a rise in vacancy rates and slower rent increases early this year. Property & Portfolio Research reports that slower economic growth has already sharply reduced warehouse space demand in Riverside, Calif., Indianapolis, Chicago, Atlanta, and Dallas.