Higher interest rates are choking off construction of warehouses that feed America’s growing e-commerce appetite, putting an end to a building boom that remade vast swaths of the country.
Over the past decade, warehouses became an investor darling as investors such as Blackstone and Singapore sovereign-wealth fund GIC bought up vast portfolios. During the pandemic, developers plastered cities and suburbs with logistics facilities to profit from surging rents and seemingly insatiable demand from Amazon.com and other e-commerce companies.
Now, many large investors are cutting back. Industrial property construction starts tumbled 48% in the first nine months of the year compared with the same period in 2022, according to data company CoStar. That was the largest drop for that period since 2009.
The dollar volume of industrial real estate sales fell by 45% in the third quarter from a year earlier, according to MSCI Real Assets.
“It was unsustainable, but no one knew how long this party was going to last,” said Vince Tibone, managing director at analytics firm Green Street.
Higher debt costs and slowing leasing demand are the main culprits. The rates on many types of commercial mortgages have roughly doubled over the past year, and land prices haven’t fallen enough to make up for that, brokers say, making it harder to pay for construction.
“We have come back down to earth a little bit,” said Craig Meyer, president of real-estate brokerage JLL’s industrial business in the Americas.
Steeper interest rates have also pushed down property values: Green Street estimates that industrial real-estate prices are down 16% from their peak.
Finally, vacancy rates have inched up as some e-commerce firms slow their leasing and the recent building boom increases competition among landlords. All of that makes developers more reluctant to build.
“It doesn’t pencil to develop right now,” Tibone said.
Unlike in the office sector, where future demand is now in doubt, warehouse landlords are hardly in crisis. Construction is still high by historical standards, vacancies are low and mortgage defaults are rare. E-commerce activity continues to grow and the industry could thrive again if interest rates continue their recent decline.
A Blackstone spokeswoman said that the sector will benefit from less construction. “We continue to see healthy supply and demand fundamentals, particularly for high-quality, infill assets, with our portfolio more than 96% occupied and rents in our markets up 8% year over year,” she said.
Still, the cooling market is a headache for investors such as Blackstone, where industrial real estate accounts for a large share of property holdings.
The warehouse boom that accelerated with pandemic lockdowns now looks finished. As Americans sheltered at home in early 2020, they began ordering more stuff online. When lockdowns ended, they didn’t stop. E-commerce firms, desperate for places to store and package all those goods, began bidding up warehouse rents. Soon, real-estate investors sniffed a once-in-a-lifetime opportunity.
Construction starts surged between 2019 and 2022, according to CoStar. The market began cooling last year when interest rates rose and Amazon announced it would add warehouse space more slowly than previously planned.
Industrial tenants signed leases for just 90.1 million square feet in the third quarter of 2023, according to JLL. That was the lowest quarterly figure since 2015.
While some places, such as the New York City area and South Florida, still have a shortage of warehouses, a number of cities with relatively abundant land saw a surge in construction and now face a glut of empty space.
Indianapolis, Denver and Texas cities Austin, Dallas and San Antonio all had industrial vacancy rates of more than 8% in the third quarter, according to JLL, well above the national vacancy rate of 4.9%.
Write to Konrad Putzier at konrad.putzier@wsj.com