Trends in the National Warehouse/Distribution Sector
By Victor Calanog and Barbara Byrne Denham
Barbara Byrne Denham is an economist in the research and economics
department at Reis Inc. She previously
served as chief economist at Eastern
Consolidated and is a Ph. D. candidate
at New York University, where she
has studied economics, monetary
theory and game theory. Reach her
Victor Calanog is chief economist
and senior vice president for research
at Reis Inc. ( www.reis.com). He writes
a monthly column on property types
for Scotsman Guide. Calanog and his
team of economists are responsible
for data models, forecasting, valuation
and portfolio services for clients in
commercial real estate. Reach him
Source: Reis Inc. *Projected
Net absorption Vacancy rate Completions
The booming warehouse and
distribution sector has an Achilles heel
One property type that stood out in 2017 for its robust growth in terms of both occupancy and rents is the
warehouse and distribution sector. Driven by the expansion and continued promise of e-commerce, leasing and
occupancy growth accelerated in 2017 after a strong run-up in 2011 through 2016.
Developers have nearly kept pace with the growth in occupancy as new completions have soared over the last
three years. Completions in 2017 are projected to be 40 percent higher than 2016 completions and at nearly
twice the build rate in 2015. This has been an appropriate level of new construction, evidenced by the fact that
vacancy rates have declined steadily over the last few years and net absorption has exceeded new completions
every quarter. Indeed, from tenant and landlord points of view, it appears to be a healthy market.
Markets with the most construction
underway — San Bernardino/Riverside,
California; Chicago; Dallas; Atlanta; and
Los Angeles — all saw rent growth of
3. 5 percent or more over the last year.
Moreover, no metro tracked by Reis recorded a rent decline over that period,
which is remarkable. That being said,
given the rapid growth in the sector, it
is worth questioning whether we could
get to the point where there may be
too much construction underway.
There are two property types that
serve as a good model for exploring this question: multifamily and
self-storage. Occupancy growth in
the multifamily sector soared after
the housing bust and stayed healthy
through 2016, but developers have
been building new properties at an
accelerating rate. New completions
in 2017 should exceed that of 2016 by
19 percent while, at the same time, net absorption is expected to decelerate and vacancy rates are increasing
in a number of markets.
Likewise, in the self-storage sector, rent growth was nearly as high as multifamily rent growth from 2012 to
2015, but new completions soared and rent growth slowed in 2016 and 2017. Thus, it seems logical that the
heightened construction activity in the warehouse and distribution space might hurt owners if the growth in
occupancy were to slow.
The explosion of warehouse space is clearly driven by e-commerce and there is no end in sight for the growth
in e-commerce. Considering online retail giant Amazon’s impressive growth over the last few years, as well as
its search for a second headquarters site, this argument has merit. Indeed, the latest retail-sales numbers show
that e-commerce sales in 2017, through September, increased 12.2 percent year over year —on par with the
double-digit growth the prior two years.
Nevertheless, there could be a point in the future when the warehouse and distribution sector becomes overbuilt. Moreover, because it usually takes less than a year to build a warehouse or flex space, most analysts and
developers likely will not realize that the sector is overbuilt until it’s too late. This is why it is important to track
construction and investment in development sites.
Again, the self-storage industry serves as a good illustration of the potential problem. Many urban developers
seeking to tap into a hot market converted old industrial buildings into self-storage units, even as ground-up
projects were in the works, leading to oversupply and downward rent pressure.
It is amazing to see how the warehouse and distribution sector has succeeded over the last few years, and it is
not surprising to see such robust construction in this asset class throughout the U.S. Still, at some point, there
may be too much supply put on the market, at which point many will say: “We should have seen this coming.” n