Supply of warehouse space set to tighten as market rebalances

The biggest warehouse developer in the US, Prologis, is forecasting a tighter market over the next two years, as “sustained retail sales growth” and normalization of inventories boosts demand for space at the same time that a slowdown in new development constricts supply.

Melinda McLaughlin, SVP and global head of research at Prologis, told Retail Brew that warehouse development boomed in response to supply chain issues during the pandemic. But now that new supply is hitting the market, developers are taking a breather.

“The second quarter of 2024 was the last quarter of really big deliveries nationally,” she said. “So the second half of this year, we’ll see a lot less incoming new logistics space.”

Slowing their roll: The drop-off is due to a combination of elevated construction costs and higher interest rates, according to Prologis, which said there were “28% fewer speculative starts in Q2” compared to a year ago. The volume of unleased space currently under construction also fell 12% compared to Q1.

On the demand side, McLaughlin explained, companies had to adjust their inventories in the wake of the pandemic to reflect changing consumer demand. “I hesitate to say [they had] too much inventory, because I think what it really was is too much of the wrong inventory,” she said.

In other words, a lot of space came online at the same time when companies started adjusting their inventory and slowing their expansions. But now that supply could be set to slow, it may be harder for retailers to find space in 2025 and 2026.

McLaughlin said her prediction that leasing activity should soon increase is based on her macroeconomic outlook that continued wage growth, particularly among lower-paying positions, and slowing inflation will drive spending.

“I think there’s been a lot of wrong predictions,” she said. “I personally have been less surprised by the resilience of the consumer.”