A new worry has emerged for a sector that has long been the favorite of commercial real estate owners: distribution centers and other warehouses tied to ecommerce are feeling the strain from an increase in development and decline in demand. The market size of real estate business in the US increased significantly in 2022 over that in 2021, according to GlobalData.
When the outbreak of the COVID-19 pandemic prompted statewide lockdowns in 2020, the industrial real estate market was already flourishing because of the massive growth of online shopping. The sudden supply-chain bottlenecks faced by retailers and an increase in ecommerce activity following the temporary closure of many brick and mortar stores led to a boom in the construction of logistics facilities.
According to commercial real estate service provider Cushman & Wakefield, logistics developers opened a record 148.2 million ft2 of space in the third quarter of 2022. The difference between that and the quarterly average for the previous five years was almost 72%. Meanwhile, as the fears of recession deepen and growth in demand slows, a record amount of new warehouse inventory is entering the market. Online retailer Amazon.com Inc. announced in March 2022 that it was pulling back on its ecommerce activities as a prospective supply glut in industrial property was likely.
Since then, Amazon has shut down, postponed the opening of, and abandoned plans for nearly 80 facilities in America. Other data indicate a general decrease in the demand for warehouse space. At the conclusion of the third quarter, warehouse tenants occupied around 108 million ft2 more industrial space than they had at the start of the quarter, but this is less than that in the previous periods.
The move to remote work has been hurting office valuations, and the decline in business travel since the pandemic hurt owners of urban hotels. However, until recently, the pandemic mostly strengthened industrial properties.
With a looming recession, retailers, ecommerce companies, and other tenants are contemplating expansion, which is one reason why the demand for warehouse is waning.
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