Welcome to CrossDock,

In this issue, we explore the rising warehouse vacancy rates across the United States and revisit the pandemic-driven warehousing boom that had a significant impact on the logistics industry. We’ll also look ahead at what the future holds for the warehousing real estate market, analyzing potential trends and whether we might see a resurgence in demand.

Blank Space 📉

When the Great Plague swept through London, claiming hundreds of lives each day, survivors clung to anything they believed might protect them. Among these was a surprising choice — vinegar. People believed it shielded them from the deadly plague.

Nearly 350 years after the Great Plague of London, in 2020, the world faced a different threat: the COVID-19 pandemic. Yet, the instinct to hoard had not changed. This time, it was the toilet paper people were panic-buying. In a frenzy, Americans cleared supermarket shelves, grabbing as many rolls as possible.

By the end of 2020, toilet paper sales had surged by 71%, with Americans spending a staggering $11 billion on it. Interestingly, it wasn’t just toilet paper that was hoarded during the pandemic. Another resource that became highly sought after in the United States was warehouse space. 

Sadly, today, the tables have turned. Both toilet paper and warehouse space have quietly lost their once-coveted status. The rush for warehouse space, which businesses fought over to store inventory during the pandemic and e-commerce surge, has slowed down. According to Cushman and Wakefield, the vacancy rate for industrial real estate has currently reached 6.4%. The last time it was this high was a decade back in 2014. 

Before diving into the rising warehouse vacancy rates in the US and the factors behind them, let’s first revisit the warehouse boom during the pandemic. 

Demand and Supply

In the United States, e-commerce has steadily transformed how people shop for years, gradually capturing traditional retail. According to the U.S. Department of Commerce, in 2014, e-commerce made up just 6.5% of total sales — a slow but consistent rise.

However, things changed when COVID-19 happened. With stores shut and millions confined to their homes, online shopping wasn’t just a convenience anymore — it became a necessity. People turned to the internet for everything, from daily essentials to medicines. The pandemic catapulted e-commerce buying in the US. In 2020, e-commerce sales reached a whopping $815 billion, making up nearly 15% of all retail sales in the US.

Businesses suddenly found themselves drowning in orders and short on storage. With so many people shopping online, companies needed somewhere to store all those products before shipping them out. This massive boom created an immediate demand for more warehouse space. 

Warehouses, especially those close to major cities, became the backbone of their operation. The country saw a rapid surge in the need for storage facilities as businesses raced to build or lease whatever space they could find to keep up with this torrent of online shopping.

What had once been a slow and steady shift became a full-on logistics race, with companies scrambling to expand their fulfillment networks to meet the non-stop demand.

So, who were the players who took part in this warehouse space race? 

Space Race

The e-commerce boom during the pandemic was driven by giants like Amazon, which wasted no time in expanding its logistical empire. Already a behemoth in online retail, Amazon responded to the surge in demand by building an even more massive network of fulfillment centers across the US. In 2021 alone, the company added over 100 million square feet of warehouse space, transforming cities into critical logistics hubs. This was also the time Amazon threw full weight behind its “regionalization” idea.

To put it simply, the country was divided into multiple regions, and each region had a fulfillment center. These fulfillment centers became the nerve center of their operations, processing and shipping millions of packages to homes across the country every day at record speed. 

But Amazon wasn’t the only one that leveraged the Black Swan event. Major retailers like Walmart, Target, and Home Depot quickly followed suit. With the pandemic driving more shoppers online, these companies realized they had to level up their logistics game. They rapidly built new distribution centers or leased industrial spaces, adding millions of square feet to their storage and fulfillment networks. For example, Walmart added 11 new facilities between 2020 and 2021, compared with four in the prior period. 

The end result of all this: the national warehouse vacancy rate was down to 3.4% by the end of 2022, according to industrial real estate developer JLL. Additionally, the national industrial construction pipeline increased to 689.4 million square feet.

Role of 3PLs

Many businesses, especially those unable to expand their own logistics networks like Amazon or Walmart, turned to third-party logistics providers (3PLs) to keep up with consumer expectations for fast deliveries. The US 3PL market grew significantly during the COVID-19 and post-COVID era, reaching approximately $240 billion in 2022, driven by the surge in online shopping and the need for flexible logistics solutions.

By the end of 2022, 3PLs controlled around 35% of the total warehouse space in the US, reflecting how critical they became during the pandemic. Vacancy rates for 3PL-occupied warehouses also remained low, averaging around 3.8%.

This demonstrates that even as the largest retailers expanded their infrastructure, 3PLs were able to capture a substantial share of the market, helping smaller retailers and e-commerce businesses keep pace with the logistical challenges posed by the pandemic's shopping boom. 

Let’s also quickly look at the locations that saw a surge in warehouses during the boom. 

Sweet Spot

In cities like Dallas, Chicago, and Atlanta, the landscape quickly changed as developers rushed to meet the growing demand for warehouse space. New state-of-the-art warehouses were constructed where once farmlands, empty retail stores, and old malls stood. Hundreds of warehouses sprung up like mushrooms after a rainy day to satiate the US consumer demand and speed.

Besides the regular urban markets like the Inland Empire, quiet, idyllic towns near major metropolitan areas also became ideal warehouse locations. Take Shippensburg, for example. Located in Pennsylvania's Cumberland Valley, Shippensburg is known for its rural charm and close-knit community. It sits along Interstate 81, providing easy access to major cities like Philadelphia and New York.

When the pandemic boom hit, centuries-old farmlands and buildings gave way to massive warehouses. In 2022, retail giant Walmart built a 1.8 million-square-foot fulfillment center in Shippensburg, employing around 500 people in a town of just 5,600 residents. 

Soon, other major brands followed suit. Companies like Amazon, DHL, Ulta Beauty, FedEx, Lowe’s, Home Depot, Kohler, and others established warehouses in Shippensburg, transforming the town into a distribution powerhouse.

In 2022, according to Savills, the Central Pennsylvania market that houses Shippensburg recorded a warehouse vacancy rate of 1.7%. And reported the largest amount of positive quarterly absorption (the rate at which space is leased or sold in a given market), and rents reached up to $7 per square foot. 

Similarly, Lehigh Valley also emerged as a critical industrial and logistics hub, thanks to its strategic location within a day’s drive of nearly one-third of the US population. Its proximity to major East Coast metropolitan areas made it an ideal site for last-mile delivery and e-commerce fulfillment centers.

The growth in Lehigh Valley’s industrial sector was fueled not only by e-commerce but also by the region’s relatively affordable land prices and excellent transportation infrastructure – such as access to Interstate 78 – made it a cost-effective option for businesses needing to scale their operations. 

Increased consumer demand, check. Low warehouse vacancy, check. Increase in construction on new warehouses, check. The script for the great American Warehousing story looked perfect. However, things soon changed, and the story was not perfect after all. 

Plot Twist 

The once-booming warehouse real estate market that took off during the pandemic has been slowing down over the years. As the pandemic faded, consumers cut down on online purchases, and the frantic demand for warehousing minimized. As of October 2024, the vacancy rates in the U.S. have climbed to 6.4%, compared to just 4.6% a year earlier. 

The primary reason behind this increase is the large amount of new warehouse space added in response to the surge in demand during and after the pandemic. However, with demand softening, these new spaces are not absorbed as quickly as anticipated.

In 2024, 113.3 million square feet of new warehouse space was added. However, 70% of that space still remains vacant upon completion, according to JLL. 

So, what’s happening to the locations that once thrived during the boom?

Let’s explain that with data. 

Industrial vacancy in the Chicago market increased to 6.8% in 2024, up from 5.1% the previous year. Meanwhile, in Los Angeles, the market saw negative absorption for the eighth consecutive quarter, with 2.2 million square feet becoming available, pushing vacancy rates from 4.1% to 6.1%. In the Inland Empire, vacancy rates surged to 9%, a significant jump from 5.2% in Q3 2023, largely due to the influx of new warehouse space. 

This underlines the fact that the explosive surge of online retail during the pandemic was an anomaly. Now that the world has returned to normalcy, the e-commerce growth trajectory has leveled off.

This has forced many businesses to rethink their logistics strategies, focusing on optimizing their existing operations rather than expanding their real estate footprint. For instance, companies that aggressively built out warehouses during the pandemic are now adopting more lean inventory strategies and are shedding the excess space they accumulated. 

Fast-delivery startup Gopuff, in 2022, closed 76 of its warehouses and laid off 10% of its workforce. Gopuff added several fulfillment centers during the pandemic. In 2021, it operated in over 50 US cities and had approximately 500 microfulfillment centers under it. 

In October 2024, Home Depot announced the subleasing of four of its distribution centers, totaling 4.7 million square feet. 

Another recent example is Flexport. The logistics company is looking to sublease some of the excess warehouse space it gained through the Shopify acquisition, according to several reports. In June 2023, Flexport bought Shopify's logistics business with an equity deal. 

Real-estate firm Savills noted that the total warehouse space available for sublease in the US hit a record high of nearly 199 million square feet in the third quarter of 2024, a 45% increase from the previous year.

No Work in Progress

Rising interest rates are another major factor that slowed down the construction of new warehouses in the US. Today, the Federal interest rate is at 5.5%. In 2022, it was close to 0.33%! So, what does this mean for warehouse construction? 

For investors, this means higher costs for financing new projects, which has dampened the pace of construction. This means building a warehouse today is much more expensive than it was in 2022, as developers face steeper interest payments on loans.

Adding to the challenge is inflation, which has driven up the cost of key construction materials such as steel and concrete, while labor shortages have pushed wages higher. These factors have made it increasingly difficult for developers to justify new warehouse projects.

Many have opted to hit pause, especially in markets where vacancy rates have begun to rise. Warehouse construction projects dropped by 43% and fell to 309 million square feet in 2024, marking the steepest decline since 2008. 

The industrial real estate sector is shifting its focus from building new facilities to filling the already constructed ones. This is a bigger challenge in regions where developers may have overbuilt. According to a Savills report, net absorption dropped to 30 million square feet, the lowest year-to-date total since 2016, signaling a slowdown in leasing activity. 

To combat the higher vacancy rates, property owners are becoming more flexible with leasing terms. Many owners are offering incentives such as reduced rent, shorter lease periods, or more negotiable terms to attract tenants, especially in regions with higher vacancies.

Another key trend is the reduction in speculative warehouse projects. Developers are becoming more cautious, with fewer taking the risk of building without tenants already secured. With vacancy rates rising and demand slowing, the market isn’t as forgiving as it was a couple of years ago.

During the pandemic, things were different. E-commerce was exploding, and speculative projects were everywhere, with developers confident that the space would be snapped up quickly by retailers and logistics companies. Now, the focus has shifted to minimizing risk. Investors are backing off from speculative developments, preferring to wait for pre-committed tenants before breaking ground.

What’s Ahead

Many experts believe that the warehouse market is poised for a significant comeback in the coming years. That is because US e-commerce sales continue to grow upward. 

According to the US Census Bureau, e-commerce sales in the second quarter of 2024 rose by 9.1% compared to the same period in 2023, amounting to over $250 billion. 

This surge is expected to push demand for warehouse space, particularly as online retailers seek to expand their logistics operations and reduce delivery times. This growth phase fuels optimism in the warehouse real estate sector.

Case in point: Despite rising vacancy rates in the warehouse market, companies like Lineage Logistics (that had a great IPO) and Ryder System continue to expand their presence in key regions. In October 2023, Lineage Logistics unveiled a new 343,250-square-foot facility in Lancaster, California, a location benefiting from strong cross-border trade.

Similarly, Ryder opened a 400,000-square-foot distribution center in Aurora, just outside of Chicago. The logistics and transport company is also expanding its operations on the US-Mexico border. It opened a new facility in Laredo, Texas, this year to capitalize on the nearshoring boom in Mexico. This reflects their commitment to scaling operations in high-demand markets despite broader economic uncertainties.

Another interesting trend worth noting is the silent change in Amazon's buying patterns. After a period of warehouse downsizing in 2022, Amazon is once again ramping up its leasing activity. The retail giant, which accounts for roughly 40% of all US e-commerce sales, is once again strategically expanding its warehouse footprint to improve delivery speeds and meet consumer expectations for fast shipping.

Amazon’s recent decision to lease more distribution centers highlights the confidence major players have in the long-term viability of e-commerce and the need for robust supply chain infrastructure.

Similarly, Prologis, the world’s largest warehouse owner, is signaling positive trends for the US logistics market. The company, which manages over one billion square feet of industrial space worldwide, saw a 25% profit increase last quarter. This is in sharp contrast to the broader downturn in the logistics sector. Prologis’s continued revenue growth, high occupancy rates, and rising rents reflect the strong demand for industrial real estate, pointing to a bright future for the sector.

Prologis’s performance underscores a broader shift in the market—warehouse space is no longer just about storage; it’s a strategic asset. Companies are seeking larger, more efficient facilities to optimize their supply chains, reduce costs, and enhance delivery capabilities. 

Conclusion 

Yes, the warehouse real estate market faces challenges, including rising vacancy rates and a slower pace of leasing activity, which have cast a shadow over the sector.

Despite this, the future holds promise. As e-commerce continues to grow and companies like Amazon increase their demand for strategic warehouse space, the sector is poised for a potential rebound. Experts anticipate that as the economy stabilizes and consumer behavior remains tilted toward online shopping, the demand for industrial real estate will recover. 

The market may be navigating a period of uncertainty now, but there are clear signs of optimism ahead. After all, while the warehouse market may be in a dark tunnel at the moment, there’s a strong indication of light at the end. 

Thank you for reading. We’ll see you at the next edition!