A study by a consulting firm has found that higher interest rates and slowing economies, as well as Amazon.com Inc.’s reduced spend on facilities, is resulting in a short-lived slowdown in global warehouse and fulfillment center construction.
Just 6,700 warehouses have been added to the global building stock in 2023. That’s a reduction of 35% compared with 2022, but still higher than pre-COVID levels, London-based Interact Analysis predicted.
“Consequently, demand for end-to-end automation solutions will also decrease and the boom we saw during the COVID-19 pandemic will come to an end. Many companies are likely to focus on automating their existing assets rather than investing in new, larger projects,” the firm said.
As with many other sectors, the recent economic downturn has hit the warehouse construction sector hard. Research by Interact suggests that fulfillment center construction has suffered in particular, partly driven by Amazon’s (NASDAQ: AMZN) decreased spend on microfulfillment projects.
In response to the rising trend toward online shopping and e-commerce during the pandemic, the consultancy saw an increase in the construction of fulfillment centers to cope with this demand. Amazon accounted for a large proportion of this activity, as it doubled its fulfillment capacity between 2020 and 2021.
But as the trend toward e-commerce begins to slow down, the construction of new fulfillment centers has also dipped. In 2022, 4,000 fulfillment centers were added to the global building stock. This is forecast to be cut in half this year.
“Consequently, demand for end-to-end automation solutions will also decrease and the boom we saw during the COVID-19 pandemic will come to an end,” the report said.
The U.S. economy will decline over the next 12-18 months, that could lead to a knock-on effect on global warehouse construction over the next few years, according to the report.
However, the growth in e-commerce since the pandemic is likely to dampen the shock to the warehouse construction sector. This is a lagging indicator, so a significant decrease in construction is expected in the second half of this year and the first half of 2024, the report said.
Overall, almost 10,000 warehouses were added to the building stock in 2022.
China and the U.S. are leading the way in terms of warehouse construction. In 2022, the two countries combined accounted for 58% of total square footage added. The United States’ total warehousing stock increased by 6% year-over-year and China’s by 5%. The research shows that Japan and France registered the lowest growth in terms of additional warehouse square footage in 2022.
Rueben Scriven, research manager at Interact Analysis, echoed many experts’ thoughts when saying that the construction downturn is due to lack of demand. “Rather, it is due to high interest rates and poor economic conditions,” he said. “The slowdown in warehouse construction is likely to be short-lived as the demand for sites is still there. Rent prices are anticipated to increase in the mid-term and e-commerce will continue to drive demand over the long term.”