US logistics and warehousing construction hits decade low as interest rates rise

Driven by a combination of factors, predominantly the interest rates, and weak demand, the US logistics warehousing construction has plummeted to its lowest point in nearly a decade. According to insights from CoStar, the volume of logistics construction starts i.e. the initiation of concrete pouring and metal placement for new projects, has not seen such a significant drop since the first quarter of 2014. Interestingly, this decline has impacted all major markets, including those with ample space for development, such as Dallas/Fort Worth and Phoenix.

As a result of this major dip, one can also notice a reduction in net absorption, as retailers scale back their warehousing operations, especially those closely tied to the residential housing and office sectors. All of this can ultimately be attributed to the rising interest rates affecting real estate transactions. Even third-party logistics providers have shown a slowdown, although demand from e-commerce entities remains relatively stable.

Additionally, developers, who have already grappled with high labor costs for several quarters, now face increased capital expenses. Institutional investors, a crucial factor in the logistics warehousing boom, are exerting pressure for lower prices to offset higher interest expenses.

This declining trend is expected to continue until the latter half of 2024 and into 2025. However, projects currently underway, many of which have been in progress for over nine months, will be completed in the coming six to nine months. Despite reaching a peak in 2022 with the highest industrial construction levels in 30 years, the logistics warehousing sector has faced delays in projects due to shortages of various building components.

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