At the beginning of the pandemic, businesses couldn’t keep enough product in stock to satiate the spending sprees of consumers stuck in their homes. Now, warehouses are piled high with goods that won’t move.
So, as we approach the end of 2022 and move into 2023, what can we expect from the state of the warehouse market?
The impact of the supply chain on warehouse space
At the onset of the pandemic, many consumers looked to ecommerce and next-day delivery to meet their needs, creating an overwhelming demand on retailers. Big box stores upped order sizes and increased warehousing space, hoping to avoid future production lockdowns. Amazon, for one, doubled the size of its fulfillment network in just 24 months as its business surged.
This spike in demand caused high prices on warehouse rental and limited availability, putting further stress on supply chains — which were already strained due to manufacturing slowdowns and port backlogs. Inventory was often stored on trailers or in shipping containers due to lack of warehousing space, causing the costs of containers to surge to exorbitant levels.
The warehouse market at the close of 2022
The spending boom is slowing down, largely due to inflation. Additionally, as pandemic restrictions lift, consumers are shifting their spending toward services like travel and dining rather than just physical goods.
This move away from retail spending means that product isn’t moving, leading to a lack of storage space for new inventory and cash flow issues. The inventory pileup dragged down total economic growth by 1.9% between April and June — a trend expected to continue in the next GDP report — and stock shares of major retailers like Target and Nike have fallen due to inventory concerns. Many businesses are trying to get rid of excess stock by starting holiday sales even earlier than usual and slashing prices on items that don’t typically go on sale.
Still, the average warehouse vacancy rate in the U.S. increased to 3.2% in Q3, up from 3% in Q2 — the first increase in two years. And companies signed new leases for 163.1 million square feet of warehouse space in Q3, which is more than the square footage leased during any quarter of 2019 (though slightly less than Q2 2022’s 207.4 million square feet). Space remains tight, certainly, but experts say they see signs of slowed activity and a more stable leasing market.
On the developer side, however, there is caution in taking on new projects as shipping volumes decrease and borrowing costs rise. Warehouse rates have risen significantly — rents increased 22% last year — and warehouse construction costs for new or rebuild facilities can be enormous due to ongoing labor and material shortages.
What we expect from logistics warehouses in 2023
The market may be slightly cooling off, but demand for space will still remain high as we move into 2023. Businesses will continue to attempt to clear out their excess inventory to avoid taking up space as incoming orders roll in, while also canceling orders for new inventory as consumer spending returns to pre-pandemic patterns.
Additionally, leasing deals and agreements on new warehouses may take longer, as many companies will be hesitant to make big investments in such an uncertain economy.
And then there’s TikTok. The social media platform, which boasts more than 1 billion active monthly users, is looking to create its own ecommerce supply chain, including warehousing, delivery, and customer returns. Details haven’t been finalized, but the company’s move into warehousing and logistics — along with a live shopping platform — could prove big competition for Amazon and big-box retailers.
Overall, we anticipate a topsy-turvy ride as the new year rolls around. As remaining inventory lingers, new players enter the market, and older warehouses go out of commission, we expect to continue to see a crunch in availability.
Need some certainty in the face of a fluctuating landscape? Get in touch with GlobeCon.