The president of logistics real estate giant Prologis, Inc. (NYSE: PLD) said Wednesday that community opposition to warehouse development is complicating his company’s efforts to respond to the nation’s burgeoning supply chain needs, acknowledging that “it’s just getting harder to build warehouses.”
Speaking at the San Francisco-based company’s first investor day in approximately four years, Dan Letter said that “anti-warehouse sentiment,” which gathered momentum in the post-pandemic period when warehouse demand and corresponding activity spiked, has made it challenging to add supply at an optimal pace. Communities want their goods delivered in a sustainable manner, but they don’t necessarily want the mechanisms to deliver their products — warehouses — in their backyard, Letter said.
Letter suggested to the attendees that rather than embark on another property tour, they should tune in to meetings of local planning commissions, where arguments over the pros and cons of warehouse expansion and the official decisions that come from them are made, to understand the true nature of the industry’s challenges. Letter singled out Southern California, South Florida and New Jersey — all huge growth markets with strong community activism and powerful planning and zoning commissions.
Commercial developers in the logistics segment will need to possess “more resources, patience and know-how” to navigate through the often-stormy terrain, Letter said.
The tug of war between industry and communities will likely only intensify in the years ahead. Warehouse projects that are underway will be delivered through the first half of 2024. After a sharp but expectedly brief slowdown in construction starts due to the pressure of higher interest rates, development will likely resume in 2025, especially if e-commerce demand remains strong and businesses build buffer stock to guard against future supply chain disruptions.
Hamid R. Moghadam, Prologis’ co-founder, chairman and CEO, said he expects a slowing economy and additional capacity to bump nationwide vacancy rates to the high-5% range before the capacity is absorbed and vacancies drop into the 4% range or slightly higher. Throughout much of his 40-year career, Moghadam said, vacancy rates oscillated in the 7% to 8% range.
At this point, the market is tighter than at any time other than 2021 and 2022, Moghadam said. Part of that is due to the impact of tighter money, which made projects that were viable in an era of near-free money no longer cost-effective.
The executive said the wind remains very much at developers’ backs over the long haul. “The fundamentals,” he said, “are in excellent shape.”