Warehouse Construction Stalled at a High Level
Warehouse construction spending has been stalled at a high level for more than a year after a surge in activity in 2004 to 2006, early in the economic expansion.

Warehouse construction is tracking trends in the overall economy very closely. Warehouse construction activity in 2007 stalled at a high level, parallel to the trend in Gross Domestic Product (GDP) growth. The "goods" portion of GDP increased 4.1% in 2006, but rose only 1.9% in 2007. Warehouse construction spending increased 19% from the middle of 2006 to the middle of 2007, but has declined at a 7% annual pace since then.

However, Reed Construction Data expects little if any decline in warehouse construction spending in 2008 because new facilities to consolidate distribution and renovations to reduce operating costs will offset any slack in total space demand.

Warehouse Starts
Similarly, the value of warehouse construction starts slowed slightly in the second half of 2007 and was about one-third lower than the peak in starts in the middle of 2005. The pipeline of projects underway or in planning is shrinking.

The warehouse vacancy rate dropped from over 10% in 2004 to 8.7% in the middle of 2006, but has held at that level since (as reported by Property & Portfolio Research). The vacancy rate stopped declining as the surge in warehouse space (which started early in the business expansion) was completed.

Ahead, the vacancy rate is expected to rise to over 9.0% because demand for additional warehouse space has already begun to slow with the overall economy. Warehouse rents are still increasing, up 4% last year. This is enough to limit the weakness in 2008 to 2009 construction.

Distribution Market Continues to Consolidate Geographically
The distribution market continues to consolidate in a small number of ports and inland warehouse centers. Ten states accounted for two-thirds of U.S. warehouse construction in 2007. Pennsylvania and Georgia accounted for nearly a quarter of total U.S. starts. California., Illinois and Florida together also accounted for nearly a quarter of all starts.

Warehouses should weather the current economic slowdown/recession quite well. Current inventory is about at the desired level since the current slowdown/recession is consumer rather than business led. So no sustained inventory drops are expected. Other logistics costs will be declining, especially credit rates and possibly fuel costs. This will prevent distribution and purchasing managers from having to delay warehouse additions to cover the rest of their budgets.