Spend Matters welcomes this guest post by H. Cole Hassay, economist at IHS Markit.
Americans need more space to store their goods, according to warehouse construction data. Warehouse construction rose in 2016 by 8%, coming off three years of double-digit growth as consumers continue to demand more storage space. Rising demand, along with historically low interest rates, prompted this construction explosion. Though the Federal Reserve has signaled interest rates will be rising in the near term, warehouse construction should remain positive, though less dramatic, as demand persists.
Since coming out of the recession, two factors have been responsible for the increased demand for storage space: mini-storage and general commercial warehousing. As the economy recovered, so too has consumption, consequently causing Americans to need more storage space. Thus, rapid construction of mini-storage units has occurred to respond to consumer needs. In 2016, mini-storage construction spending increased 102% as the market responded to rising demand.
Meanwhile, rising consumption levels have forced retailers, primarily those online, to find more storage for merchandise. Online retailers require two to three times more warehouse space than traditional stores, putting a significant strain on available storage space as e-commerce becomes more prominent. Since 2010, more than 120 warehouses with more than 1 million sq. ft. were built to accommodate e-commerce, while another 29 are under construction currently. In response to this demand surge, construction for general commercial warehousing increased 17% in 2016, according to the Associated General Contractors of America.
Despite a rapid expansion in the supply of warehouses, demand has continued to outpace supply, leading to leasing rate increases. Leasing rates rose over 6% in 2016, contrary to expectations at the beginning of the year. After increasing again last year, leasing rates have not fallen since 2010. Though leasing rates have increased substantially, operating costs in warehouses have been slow to follow, as shown in the chart below.
Due to the shifting consumer preference for e-commerce, warehouse construction should remain consistent going forward. Even an economic downturn would make it unlikely that consumers shift their preferences away from online retailers. Thus, healthy demand growth will be consistent for warehouse space in the near term, bringing up prices and prompting more construction. Rising interest rates may bring up the cost of construction, but it is likely that this will only marginally affect the amount of warehouse construction.
Given strong demand and rising costs, there is an upside risk to warehouse prices in the future. Though price escalation for storage space will decelerate, demand will continue to pull prices upward as e-commerce gains further market share in the retail industry.