Warehouse starts drop, spending still up 6–7%
Starting last fall, average monthly warehouse construction starts have been down almost 50% compared to averages from the previous 12 months. That earlier surge in starts resulted in warehouse construction spending growing at a 15% annual pace from mid-2005 through 2006. Recent weaker starts should slow warehouse construction spending growth to 6–7% in 2007.
The warehouse development and construction market has struggled back to equilibrium four years after the last recession. The Property & Portfolio Research vacancy rate is 9.3% and is not expected to fall much more. Net operating income is positive and rising with general inflation.
Demand for new warehouse space is slowing and, for about one more year, will only slightly exceed new supply, which is still experiencing a small increase. Similar to other buildings built primarily for lease, there is a risk of overbuilding in 2007–08. Spending jumped 75% in 1995–96, but growth will be far less than that during this building cycle because inventories are much leaner and the transition to a logistics system with fewer but larger warehouse is largely complete. The wholesale inventory/sales ratio is 1.16, down from 1.3–1.35 at the same point during the last business cycle.
About 60% of warehouse construction is found within eight large regional distribution hubs: Atlanta, Chicago, Dallas, Indianapolis, Memphis, Tenn., Nashville, Riverside, Calif., and New Jersey.