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Delaware warehouse market bucks national worries for now

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Delmarva Corrugated Packaging warehouse in Dover, Delaware

Delmarva Corrugated Packaging was one of the major warehouse additions in Kent County, but more are in the development pipeline. | DBT PHOTO BY JACOB OWENS

A year ago, the warehouse sector was red hot in Kent County. But as inflation and construction prices rise and Amazon scales back its distribution network, will that boom continue?

While there’s definitely a risk that the warehouse sector will cool in the coming months, it hasn’t taken a significant hit yet.

Numbers from the Associated General Contractors of America show a big spike in costs for warehouse construction in 2021 compared to other sectors, but that appears to have evened out over time.  

This is not actually good news. 

“It’s continued going up at a steep rate, but now other things have caught up with it,” said Ken Simonson, chief economist at AGCA.

Kent Economic Partnership Executive Director Linda Parkowski said demand “has not slowed at all” and is coming from both smaller developers and large industrial clients. 

“There are projects that are working through the approval systems, as we speak, that will hopefully give us some of the warehouse space that we need in central Delaware,” she said.

Multiple warehouse projects were still moving forward in Kent County as of December. Dover reports a slew of them at various stages of approval, with two under construction and another seven in various stages of review. The largest of those is around 296,000 square feet; others include warehouse space alongside other tenants. 

The Food Bank of Delaware is building a large facility in Milford with warehouse space, and city staff say a smaller mixed space proposal is under review. According to Smyrna planner Jeremy Rothwell, the town saw a 69,000-square-foot warehouse built in 2021 and has approved another at 133,000 square feet.

The ongoing interest is borne out by numbers gathered by Newmark, a major commercial real estate brokerage, which show demand remaining high for large industrial space in Kent County. The overall vacancy rate was 4% as of the third quarter compared to 6.6% last year, according to research manager Jared Jacobs. Meanwhile, asking rental rates have risen steadily over the past several quarters from an average of $4.80 a square foot a year ago to $5.02, he said.

Still, signs of heavy weather loom, and not just high construction costs. Simonson lists warehouse space as one of a number of sectors vulnerable to slow down in the coming months.

“A year ago, it sounded like warehouses were being placed wherever developers or owners could find the land for them,” he said. “[But now] developers are being much more cautious about where they’re going to throw these buildings up.”

One of the culprits is the industry’s biggest customer: Amazon. Earlier this year Amazon announced a plan to ditch 10 million square feet of warehouse space company-wide, either subleasing or canceling.

During the pandemic, a surge of orders for consumer goods and home delivery, which led to an immense expansion of warehouse space, Simonson said. But Amazon’s reduction in the face of slowing demand is “a significant chunk of the overall market.”

That said, Bryon Short, executive director of the Delaware Contractors Association, reports that commercial builders in the state have not yet seen the kind of slowdown that residential contractors have seen.

Material costs are no small issue, but builders also still have problems with the supply chain and face high labor expenses because of inflation, Short said. But despite all that, he’s not seen developers scuttle warehouse projects already underway.

It could be a while, though, before we see the full effects of the market challenges. As Short noted, projects like warehouses can take years to go through regulation and permitting.

While materials like lumber, metal and steel have seen big price declines in the last year, Simonson said, he predicts the biggest stress in 2023 is going to be on cement and concrete products, which are key material for warehouses.

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