Construction of warehouses with at least 300,000 square feet rose 77% in the last quarter of 2016, adding up to 25.5 million square feet, according to research from real estate brokerage firm Colliers cited by The Wall Street Journal.
However, demand from retailers for that kind of space has fallen, dropping 19.3% from the year-ago period, leading vacancy rates to climb 7.7% from 7.5% in 2015, according to the report. Such big-box warehouse construction is increasingly being built on a speculative basis: About 58.5 million square feet were built on spec, up from 34.8 million square feet the year before, and twice the pace of the construction of “build-to-suit” warehouses. Four years ago, by contrast, 7.4 million square feet of those big warehouses were built to order, while just 5 million square feet were built on spec, according to the report.
Rents aren’t falling much despite that because there is still demand, according to real-estate company CBRE Inc. via the Journal.
E-commerce and omnichannel retail has been driving demand for additional warehouse and distribution space, especially closer to urban centers to enable faster last-mile delivery, but developers are keeping up with the pace of that demand and more.
Those closer-in spaces are fetching higher rents, according to a CBRE report last year. Rents for prime warehouse space in the U.S. rose 9.9% in 2015, well past the 2.8% increase in the global industrial leasing rate. Six markets in particular were among the nine with the biggest increases globally, with Oakland (29.8%) topping the increases seen in also-hot Northern New Jersey, according to that report. CBRE said then it expected the trend to continue, with warehouse rents rising another 6% in the most in-demand markets in 2016.
Amazon alone has built a vast warehouse and fulfillment network nationwide; it limited some of that space to newer marketplace sellers over the holidays, suggesting some of its capacity is getting precious.
Many retailers are now leveraging stores to fulfill online orders, which could mute the demand somewhat. Target this week announced it is revamping stores to the tune of $7 billion to improve its customers experience as well as to house and fulfill merchandise for online orders, including deliveries and in-store pickup services. Still, warehouse space, despite what appears to be a trend heading to some amount of over-capacity, looks to remain a premium expense line for retailers as rents remain stable.