Anticipating a Downturn: Warehouse Construction Set for Substantial Decline in the Second Half of 2023

Experts are predicting a substantial slowdown in warehouse construction in the upcoming months, mainly due to the anticipated deterioration of economic conditions. The surge in new fulfillment center constructions observed during the Covid-19 pandemic is also expected to dramatically decrease, as consumers who shifted from physical to online shopping revert back to their previous habits. Within the next 12 to 18 months, the United States is likely to experience a significant downturn, resulting in a decline in warehouse construction rates. The decrease is expected to be particularly notable in the second half of 2023 and the first half of 2024.

While the demand for warehouses has not diminished, warehouses have been impacted by unfavorable global economic conditions, particularly the rise in interest rates. Although the continuous growth of e-commerce is expected to provide some cushioning, it is estimated that approximately 6,700 warehouses will be constructed in 2023. This represents a 35% reduction compared to the 10,000 warehouses built in 2022, although it is still higher than pre-Covid levels.

Fortunately, experts believe that the anticipated slump in warehouse construction will be short-lived due to sustained demand for sites. Rent prices are expected to increase in the medium term, and the long-term growth of e-commerce will continue to drive demand. Over the next five years, a total of 28,500 warehouses are projected to be built worldwide.

While there may be lower demand for end-to-end automation, the share of warehouses incorporating some form of automation is predicted to rise from 18% to 26% by the end of 2027. Automation is particularly prominent in food and beverage warehouses and the parcel sector. A significant portion of these new warehouses will serve as direct-to-consumer fulfillment centers, requiring substantial investments in both labor and automation technologies.

The demand for fulfillment centers experienced a significant surge during the initial stages of the pandemic, driven by the increased reliance on online shopping and e-commerce. Amazon, in particular, doubled its fulfillment capacity between 2020 and 2021. Worldwide, approximately 4,000 fulfillment centers were opened in 2022. However, it is anticipated that this number will decline by 50% in 2023, primarily due to reduced spending on microfulfillment by Amazon.

This decrease in fulfillment center development is expected to have implications for the demand for end-to-end automation solutions. Instead of investing in new and larger projects, many companies are likely to focus on automating their existing assets.

On a global scale, the United States and China lead in warehouse construction, accounting for 58% of the total square footage added in 2022. Japan and France rank lower in terms of warehouse construction activity.

Written by Ken Miller, President of StateWay Logistics