Larger Warehouses Faring Better Than Smaller

"The difference in performance of smaller versus larger warehouse buildings could be due to the mere fact that larger buildings take longer to build and are harder to abandon once in the start phase, or that many are owner-occupied, single-tenant," observes Stone Mortimer. "[But the data] also suggests that many larger buildings are still being completed due to the anticipation that when global trade recovers there will be demand for larger warehouse space. New industrial supply is anticipated to fall to record lows over the next couple of years, and the smaller warehouse category is suffering more in terms of negative net absorption."

The economist notes that demand for larger US warehouse and distribution buildings has grown substantially since China joined the World Trade Organization in 2001, opening the door to greater US-China trade. However, current economic turmoil has slammed the brakes on development. Data from TWR/Dodge shows new industrial space construction will hit historically low levels this year and next. In fact, says Stone Mortimer, the pace of development is expected to slow to such a degree that the annual amount of supply completed over the next two years will be roughly equivalent to that of the early '90s. The previous minimum for industrial development occurred in '93, when stock grew by just 0.7%.

According to the TWR/Dodge Pipeline, the number of deferred warehouse projects has increased nationwide over the past two years. In '07, there were a total of 358 deferred warehouse projects. The number jumped to nearly 700 in '08, and this year there were more than 300 projects deferred in Q1 alone. The markets with the greatest number of deferrals are primarily those that disproportionately affected by the housing crisis, such as Phoenix, Las Vegas, Riverside, CA and Orlando and Jacksonville, FL. Detroit, which is experiencing unprecedented hardship with the failure of GM and Chrysler, also has a high number of projects on hold.

There are fewer deferrals, however, for larger projects. Of the approximately 66 million square feet TWR/Dodge calculates as under construction and slated to come online through next year, nearly half involves projects of 400,000 square feet or larger. The favor shown larger projects, says Stone Mortimer, reflects the segment's greater strength in terms of demand.

"Demand for the larger buildings just turned negative in the first quarter of 2009, with three million square feet of negative net absorption, compared to 49 million square feet (of negative absorption) for smaller warehouses," she points out. "Since the onset of the financial crisis, demand has fallen off precipitously for smaller warehouse buildings, which have experienced negative net absorption since the second quarter of 2008."