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Where are the Warehouses?

By: Michael Hoban

What’s the Story Behind the 2023 Warehouse Market?

Those who merely peruse the headlines of the The Wall Street Journal and other respected CRE publications may get the impression that the warehouse/distribution market is headed for trouble. “Warehouse Leasing Tumbled at the End of 2022” read one headline, “Industrial Leasing Deflates as Air Leaks Out of E-Commerce Boom” read another at the start of 2023. And while there has been a slowdown in both leasing and development—for vastly different reasons—the market remains strong.

“The headlines are always sensational,” says Chad Griffiths, SIOR, partner with NAI Commercial Real Estate in Edmonton, Alberta Canada. “It’s been, ‘The warehouse industry is grinding to a halt!’ or whatever superfluous language they use to make it sound like the market is crashing. But then, when you dig deeper into the articles and find out what is really happening, it’s a different story. Both 2020 and 2021 were the hottest years I’ve ever experienced in my 18 years, by far. We saw a very big uptick in everything—supply, demand, and occupancy. So 2022 was just a tapering off.”

Although on paper there was a precipitous drop-off in leasing year-over-year—with absorption declining by 25%, according to Q4 preliminary figures delivered by Amanda Ortiz, national director of industrial research for Colliers—those numbers need to be put in perspective. The market still absorbed approximately 450 million square feet in 2022 (with new construction delivering an equivalent amount of space, a new record), and the vacancy rate dropped from 4.0% at the close of 2021 to 3.7% by Q4 2022. Compare those numbers to pre-pandemic Q4 2019, when Colliers reported that the U.S. industrial vacancy rate closed out the year at 5.1%—then one of the lowest rates on record—with 240 million square feet of absorption. In-place rents for industrial space averaged $7 per square foot in November 2022 according to Commercial Edge, growing 6.5% year-over-year, while the average rate for leases signed since November 2021 increased to an eye-popping $9.07.  

“Companies went from keeping as little stock in their warehouses as possible to adding more space to serve as a buffer in their inventory, which turned out to be more than they needed, and are now in course correction.”

“The media tends to latch onto just the fact that year-over-year the market has gone down, and while that’s true, it’s still up from pre-2020 levels,” says Griffiths. “It’s like saying LeBron James had an off night when he scored 50 points, compared to the 70 he scored the night before.”


Although leasing will remain strong in 2023, Griffiths does expect some degree of slowdown in 2023 from the manic pace of leasing in the peak years, as companies take a more cautious approach while they re-evaluate their space needs. Much of the increase in demand came due to pandemic-generated supply chain issues, he explains, as companies transitioned from a ‘just in time’ model that had been in place for the last couple of decades to the ‘just in case’ model. “I think a lot of that was fear-induced early into the pandemic, where we saw shortages of toilet paper and other products, so a lot of companies panicked and wanted to increase their safety stock.” Companies went from keeping as little stock in their warehouses as possible to adding more space to serve as a buffer in their inventory, which turned out to be more than they needed, and are now in course correction.


Another issue generating somewhat misleading headlines has been the increase in sublease space. The reality is that the total of sublease space through Q3 2022 was under 70 million square feet in a market of approximately 11 billion square feet. While sublease space is up significantly year-over-year (46% according to Colliers’ Ortiz), that number is in line with pre-pandemic historical levels of 67.5 million square feet. Much of the angst has been driven by the pullback by Amazon, which CoStar reports may be offloading 30 million of its 370 million square feet of leased warehouse/distribution space for sublease. Observers have noted that the move is also being driven by Amazon’s more recent shift to owning rather than leasing properties, as the online retail giant spent at least $2.3 billion to acquire dozens of properties totaling more than 5,000 acres from early 2020 through the close of 2021.

Melissa Alexander, SIOR, senior vice president at Foundry Commercial in Nashville, Tenn., feels that the Amazon effect is overblown. “The Amazon sublease space only represents a small amount of their total portfolio, and they still have lease contracts, so they’re paying their rent,” says Alexander, who adds that the only significant sublease space in the Nashville market belongs to Amazon and one of their suppliers. Nashville also sports one of the lowest vacancy rates in the U.S. at 1.2%, according to CommercialEdge. “So there hasn’t been a huge influx of space coming on the market, and direct vacancy has not taken a hit."


Griffiths, who keeps abreast of trends for the entirety of the North American industrial market in preparation for his weekly industrial podcast, is also not concerned about sublease space coming onto the market because the fundamentals of industrial are still very strong. “If anything, it will probably be offset by some of the developers who are now canceling or postponing development just because the cost of debt to build is higher,” he says. “That sublease space might actually be helpful in markets that don’t have new inventory coming on.”

Alexander has concerns about the long-term effect the slowdown in development will have on warehouse/distribution availability, as the drastic increases in interest rates (from near zero levels in the spring to between 4.25% and 4.5% in December) have put many deals on hold. “We saw all those under contract deals just drop, so now we’ve had this three-to-four month period where new construction (unless it was already capitalized or underway) has been put on hold,” says Alexander. “Space is already tight, and I and brokers in other markets that I’ve spoken with think industrial space is going to get even tighter in 12 to 18 months because of the lack of construction today.”

Alexander points out that consumer behavior changed drastically at the onset of the pandemic, as consumers were “re-trained” during that period to not only do more of their shopping online but to expect goods to “show up on our doorstop” the next day. And that behavior is unlikely to change, as e-commerce, which accounted for nearly 19% of retail sales worldwide in 2021, will balloon to 24% of total sales by 2026, according to market research firm Statista. Add that to the companies’ shift in warehousing models, where “‘just in time,’ became ‘just too late,’ became ‘just in case,’” says Alexander, and the market should remain healthy for the foreseeable future, with rent increases continuing in the near term. Alexander’s optimistic view of the market is further supported by a November 2022 CBRE survey of 100 major industrial occupiers throughout the U.S., where 64% percent of respondents indicated that they planned to expand their U.S. logistics footprint versus 7% who planned to decrease theirs.  

“Consumer behavior changed drastically at the onset of the pandemic, as consumers were “re-trained” during that period to not only do more of their shopping online but to expect goods to 'show up on our doorstop' the next day.”

Out west, Amy Ogden, SIOR, executive vice president with LOGIC Commercial Real Estate in Las Vegas, reports that the fundamentals in Vegas bode well for continued success. The market registered 3.2 million square feet of absorption in Q4 of 2022, driving the vacancy rate to a historic low of 2.1%. There is approximately 15 million square feet of space currently under construction in the market, but over 50% of that space was pre-leased prior to construction, and 90% of the space delivered in 2022 was leased by project completion. And demand for space continues to be robust.

“Of the tenants looking for space in this market, I would say that three-quarters of them are 3PL providers,” says Ogden, who adds that 3PLs are expected to increase their percentage of the Vegas logistics market from 30% to over 40% in 2023—in line with national trends. She cites the difficulty companies are having in securing warehouse space, labor shortages, rising transportation costs and economic uncertainty as the drivers of the shift to 3PLs. “So, we are seeing the footprint of 3PLs starting to grow, which means we’ll continue to have that high absorption.”

Like Alexander, Ogden is concerned that interest rate hikes will slow development. “It’s bound to happen, given the cost of debt,” says Ogden. “It used to be 65% loan to cost on a construction loan, but now lenders are offering 50%, so you’ve already come out of pocket with 50%, which makes your margins really tight, so we will see some projects stall. That’s going to cause developers to re-evaluate, but I don’t think that means we’re going to be underbuilt either.”

Despite the headwinds in the economy, the continued strong performance of the industrial market seems assured, as investors and developers are still very bullish on the long-term prospects for industrial. “I think there’s going to be a bit of a pullback, but that pullback is still higher than the levels we saw in 2019,” predicts Griffiths. “I think the main message to keep in mind is, ‘Yes there is a pullback, but it’s coming off absolute record numbers.’”


Melissa Alexander, SIOR

Amy Ogden Benvenuti, SIOR

Chad Griffiths, SIOR


Media Contact
Alexis Fermanis SIOR Director of Communications
Michael Hoban
Michael Hoban

Michael Hoban is a Boston-based commercial real estate and construction writer and founder of Hoban Communications, which provides media advisory services to CRE and AEC firms. Contact him at michaelhoban@comcast.net