America’s warehouse construction boom, epitomized by the sprawling logistics operations of Southern California’s Inland Empire, may have reached its peak.
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Earlier this year Prologis, the world’s biggest warehouse builder, reported that 2021 was a record year for logistics real estate in the U.S. This is attributed to robust pandemic-era consumer spending paired with supply chain disruption, which spurred competition for warehouse space and drove up rents. Demand outstripped supply, causing vacancies to fall to an all-time low of 3.4%. It would turn out the industry was only winding up. This year its ascent has been precipitous, prompting both pushback and questions of an impending slowdown.
The national boom in warehouse construction is playing out most vividly in Southern California’s Inland Empire (IE), the hottest warehouse market in the world. The logistics industry has been the region’s economic engine for years, as it is an ideal hub. It sits in close proximity to the nation’s two biggest ports, Los Angeles and Long Beach. It also has the transportation infrastructure to support the mighty flow of inbound and outbound trade, including a rail network, air hubs for FedEx and Amazon, and an expansive freeway system.
Warehouse building in the IE has been frenetic, says real estate firm CBRE. The region’s vacancy rate has plunged to 0.2%, lower than anywhere else on earth, according to The Economist. Rents have “soared by 72% in the past 12 months.” But rents form only a small part of the typical company’s logistics costs. James Breeze, Senior Director and Global Head of Industrial & Logistics Research at CBRE, estimates that transportation accounts for about half of a company’s supply chain expenses, while rent comprises only 6%. An advantageous location like the IE can cut down on trucking costs, making it worth the price.
The rise of ecommerce has naturally played a major role in the warehouse real estate boom. While the roar of this global force has quieted since the pandemic, it has indelibly changed consumer shopping habits and lifestyles. With this comes the need for vast stretches of warehouse space. And at present, supply chain issues and an uncertain geopolitical climate are contributing to demand. Prologis sees its customers holding about a tenth more “safety stock” to mitigate the risk of supply shortages.
The belief that the boom has peaked is becoming more prevalent. Warehouse construction faces mounting opposition from municipal and environmental groups. This is exemplified by contention in the IE, where opponents cite public health as well as environmental concerns related to diesel emissions. A growing number of cities in the region are passing restrictions on new developments. The message is getting through, and companies are taking some steps to curb environmental impacts. Amazon has ordered 100,000 electric delivery vans from Rivian. Prologis is increasing the capacity of its solar panels.
Any deceleration is more likely to result from economic headwinds. FedEx warned of this in September, when it discarded its earnings forecast. Both FedEx and Prologis have seen drops in their share prices recently. Amazon has acknowledged overbuilding, and dialed back its warehouse plans after seeing quarterly losses for the first time in roughly a decade. The logistics industry will probably continue to dominate the regional economy, but the momentum of recent years cannot keep building indefinitely.