When rates for ocean, air and road transport sank in 2023, the warehousing market remained buoyant. Facilities were bursting at the seams with inventory that retailers had piled up in anticipation of continuing growth in demand, which kept warehousing rates at lofty heights. This year, slowing global trade has caught up with the sector, pushing vacancy rates to levels not seen since the Covid pandemic.

 

In the United States, the Distribution and Fulfillment Index for the second quarter, published by ITS Logistics, shows a warehouse vacancy rate of 6.2%, up from 5.7% in the first three months of 2024. ITS pointed out that this marked a record space availability since the start of the pandemic.

 

The writing has been on the wall. Global real estate company Colliers reported vacancy rates had risen to 5.5% in the final quarter of last year – the highest since the second quarter of 2016.

 

Prologis, a real estate investment trust (REIT) that specializes in logistics properties, saw occupancy of its facilities at 96.1% in the second quarter, 140 basis points lower year on year.

 

Core funds from operations in the period fell 49 cents from a year earlier to US$1.34 per share.

 

Management has scaled back its investment plans for this year in response to the cooling market. Instead of US$3 billion to US$4 billion, it now aims to spend US$2.5 billion to US$3 billion. In its outlook, the company expects vacancies to peak in the next couple of quarters before the market undergoes another round of tightening.

 

Investors in China’s logistics and distribution segment would likely be relieved if the downturn they are experiencing were to reverse course after a few months.

 

Commercial real estate services firm Cushman & Wakefield reported that vacancy rates in the warehousing sector hit 19.2% in northern and eastern China in the first quarter of this year. Business parks in Beijing saw vacancies up 20.5%.

 

Observers attribute the slump to a slowing Chinese economy marked by tepid consumer demand. Exports were strong in the early part of the year, but concerns about foreign governments seeking to slow the flow of Chinese exports with tariffs are giving manufacturers and investors pause for thought.

 

The migration of production to other regions, notably Southeast Asia and Mexico, is not helping warehouse owners marketing and renting out their properties.

 

Investors in the previously thriving market are hurting. According to Bloomberg, international investors poured more than US$100 billion into Chinese warehouses, industrial buildings, business parks and office towers over the past decade.

 

A quick recovery is not in sight. In an earnings call in April, Kiat Ng, then-CEO of REIT Mapletree Logistics Trust in Singapore, warned that the Chinese market would remain volatile and uncertain for the next 12 months.

 

Ng stepped down from her role as Mapletree Logistics Trust’s CEO on July 22. She has held the position since July 2012 and has taken on a new role at parent company Mapletree Investments.

 

Warehousing customers responded to the rapid deterioration in the Chinese market with efforts to renegotiate rents and push for shorter contract terms. Cushman & Wakefield registered a 13% drop in rents from the final quarter of 2023 to the first quarter of this year.

 

According to Prologis, global rents were off 2% on average in the second quarter.

 

While rising vacancy rates have dragged down rents, warehouse operators are coping with elevated costs. In the U.S., wages for warehouse personnel have climbed 40-50% in the last five years to an average of US$18.99 an hour.

 

This is driving the adoption of technology and automation in warehousing, ITS noted.

 

According to a report by consultancy Gartner, the automation market is set to grow at a compound annual rate of 15.91% between 2023 and 2032 to reach US$71.01 billion.

 

The Asia Pacific area is going to be the fastest growing region, Gartner predicted.

 

During the earnings call on his company’s second-quarter results, Prologis president and CEO Hamid Moghadam expressed confidence that the current retreat would reverse itself after a couple of quarters.

 

He pointed to a shrinking warehouse construction pipeline, reduced development starts and subdued demand, arguing that their combined impact would hold vacancies in check.

 

Commercial real estate investment trust CBRE has also predicted that the vacancy rate would retreat, citing the decline in construction starts in warehousing this year.

 

In China the outlook for REITs and investors is less promising. Cushman & Wakefield has counted 33 million square meters of new warehouse space that are scheduled to come on stream before the end of 2026.

 

If the consumer market in China fails to pick up and export momentum is dented by tariff barriers, the market may be struggling to absorb the additional capacity.

By Ian Putzger

Correspondent | Toronto