Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Reshaping the Warehouse Industry
Transcript
- Lucas: So the warehouse industry — the vast universe of industrial real estate that houses everything from Amazon fulfillment centers to your neighborhood grocery distributor — is going through a really interesting contraction right now. And it's a perfect stagflation story. Luna: Because you've got high construction costs, high interest rates, but demand is still there in certain pockets — just not across the board. Lucas: Exactly. Let's start with the big picture number. The national vacancy rate for industrial space hit 6.3 percent in the second quarter of 2026. That's up from 4.7 percent a year ago. So we've added about 160 basis points of empty space in twelve months. Luna: And that's after years of sub-5 percent vacancy. The market was incredibly tight post-pandemic, with all that e-commerce growth. Lucas: Right. During 2020 and 2021, we saw vacancy rates dip below 4 percent in some major markets. Developers went on a building spree. But now, with the cost of capital where it is — the ten-year Treasury is still hovering around 4.5 percent — those projects are getting harder to justify. Luna: Especially the speculative stuff. If you're building a warehouse without a tenant lined up, you're taking on a lot of risk. Lucas: That's exactly the key distinction. Construction starts for industrial space are down nearly 40 percent from the peak in 2022. But if you look at build-to-suit projects — where a specific tenant like Walmart or a third-party logistics firm signs up before construction begins — those are actually holding up better. They're down, but only about 15 percent. Luna: So the market is bifurcating. Speculative buildings are sitting empty longer, while pre-leased projects still get financed. Lucas: And that's a direct stagflation dynamic. On the inflation side, construction materials and labor costs are still elevated. Steel is up about 12 percent year-over-year. Concrete is up 8 percent. Skilled construction labor is scarce and expensive. So the cost to build a new warehouse has risen maybe 25 to 30 percent since 2020. Luna: And on the growth side, you've got a slowing economy. Real GDP growth annualized was just 2.1 percent in Q1, and the jobs report for June showed only 57,000 new nonfarm payrolls. That's not a booming demand environment. Lucas: So you have higher costs to build, higher financing costs because of interest rates, and tenants who are more cautious about expanding. That combination is squeezing the entire development pipeline. Luna: What about the existing stock? Are rents still growing? Lucas: They are, but much more slowly. Year-over-year rent growth for industrial space nationally is running at about 2.1 percent. That's down from double-digit growth in 2021 and 2022. In some overbuilt markets like Phoenix and Dallas, you're seeing concessions — a month or two of free rent — to keep tenants from leaving. Luna: Which is pretty remarkable for industrial real estate. That sector was the darling of commercial real estate for years. Lucas: It was. And it's still healthier than office or retail. But the margins are thinning. Take a typical distribution center in the Inland Empire east of Los Angeles — that was the hottest industrial market in the country during the pandemic. Vacancy there has risen from below 2 percent to nearly 5 percent now. Luna: And that's a market that benefited enormously from port activity and e-commerce. If it's softening there, it's a signal. Lucas: It is. And one more data point: capitalization rates — the yield that investors expect from a property — have expanded by about 100 to 150 basis points over the last year. So a warehouse that would have traded at a 5 percent cap rate in 2022 might now trade at 6.5 or 7 percent. That means property values are declining. Luna: Which makes sense if the cost of debt is higher. Leveraged buyers can't pay as much. Lucas: Right. And that feeds into a broader theme: stagflation forces companies to optimize existing assets rather than build new ones. So instead of leasing a new 500-thousand square foot warehouse, a retailer might renegotiate its current lease for better terms, or invest in automation to get more throughput from its existing space. Luna: We're seeing that with some of the big retailers. Walmart has been very public about slowing its warehouse expansion and focusing on retrofitting existing facilities with automation technology. Lucas: And Amazon too. After the massive expansion in 2020 and 2021, they've been subleasing space and pulling back on new commitments. Their capital expenditure on fulfillment has shifted toward technology, not square footage. Luna: So for listeners who are in supply chain or logistics roles, what should they be watching? Lucas: I'd watch two things. First, the spread between the ten-year Treasury yield and industrial cap rates. If that spread narrows further, it means developers need even higher rents to break even, which could slow new supply even more. Second, watch the absorption numbers — net new space leased minus space vacated. If absorption turns negative nationally, that's a bigger warning sign. Luna: And for now, absorption is still positive, just much lower than in 2021? Lucas: Correct. Net absorption in Q2 was about 45 million square feet nationally. That's down from over 100 million square feet per quarter in 2021. So demand hasn't collapsed, but it's clearly decelerating. Luna: It really does feel like a textbook stagflation scenario for one specific industry. Higher input costs, slower demand, and everyone trying to figure out how to navigate it. Lucas: And if you've been following these episodes, you know we drill into one industry at a time. If walking through the economy with us has made something click, honestly, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's a small thing that makes a big difference for us. Keeps everything ad-free and independent. Lucas: So back to warehouses — one last thought. The real wildcard is interest rates. If the Fed cuts later this year or in 2027, we could see a snapback in development. But if stagflation persists, we're looking at a prolonged period of consolidation. The next few quarters will tell us a lot. Luna: And whether those build-to-suit projects can keep up with the slowdown in speculative building. Lucas: Exactly. That's the thread to follow.