The pace of industrial growth in the U.S. has soared over the last 18 months, but a community of bone-tired developers may soon get a breather as banks scale back lending and early indicators of a drop-off in demand begin to materialize.

There were a record 717M SF of industrial projects under construction in the U.S. in the third quarter, and robust tenant demand has thus far kept vacancy rates in the low single digits, according to data from Cushman & Wakefield. Inventory remains tight, eradicating any near-term fears of overbuilding, per the report.

But mounting hesitancy to underwrite new projects, especially among large institutional banks, has made it much harder to get a construction loan, signaling a meaningful decline in supply added to the pipeline over the next few months.

“When you shut down lending, particularly in commercial real estate, it’s going to affect the economy,” Hillwood Investment Properties President Tal Hicks said. “And that’s what we are feeling right now.”

Hicks, along with Link Logistics Real Estate Vice President of Development Brian Strohl and Prologis Central Region President Jonathan Rudersdorf, discussed how their respective firms are being impacted by macroeconomic challenges during a panel at the Society of Industrial and Office Realtors’ CREate 360 conference, held Oct. 20 at the Omni Hotel in Dallas.

Across the board, the companies have either dramatically reduced or altogether paused speculative projects, mostly due to a lack of institutional capital. Prologis announced a widespread shift to build-to-suit during its third-quarter earnings call, and Strohl said rising interest rates putting upward pressure on cap rates have also led Link to rein in spec.

“The uncertainty is the problem,” Strohl said. “The cap rates — it would be one thing if we knew what they were and what was coming, but we don’t.”

A lack of clarity around values will likely force a reset on the price of land, Rudersdorf said. A scarcity of developable sites pushed prices up by almost 40% between midyear 2020 and 2021, and those costs have continued to climb, according to Newmark.

“Land values will absolutely have to get reset to the tune of 30%,” Rudersdorf said. “It’s hard to guess where they will fall at the end of the day, but there will absolutely be a correction on the land side.”

Hesitancy in the capital markets isn't the only factor slowing industrial development. As the demand for faster shipping places fulfillment centers closer to homes, a groundswell of NIMBYism is beginning to slow momentum, too.

“They want products in 15 minutes … but they don’t want buildings and trucks,” Strohl said. “If you stop ordering products, the buildings won’t come close to you. But that’s not how it works.”

Getting new projects entitled is quickly becoming one of the biggest pain points for industrial, Rudersdorf said. Developers must be prepared to make a strong case for why the project is needed and be willing to make sacrifices along the way.

“There’s low impact to city services than other traditional product types,” Rudersdorf said of industrial’s benefits. “It provides stable product tax — that’s a huge part of the equation. You have to come into the conversation understanding what the municipality and local community wants.”

Warehouse and logistics space continues to lease up at breakneck speeds, especially ahead of the holidays.

But trends playing out in other sectors, such as turmoil in the housing market and the growing trend of retail rightsizing, could be signs demand for industrial space will cool in the coming months, Rudersdorf said.

“No one has their head in the sand to think that demand isn’t going to not have some sort of correction,” he said. “We are still in an environment of extremely low vacancy rates. … We can sustain a little blip in demand.”

A burgeoning group of tenants looking for smaller swaths of space may carry the industry through a recession, Strohl said. Link is noticing a growing need for warehouses in the 15K SF to 20K SF range, which is a departure from the massive amounts of space taken down by e-commerce giants like Amazon.

It is also one that could prove opportune in a moment that finds most large-scale users hitting the brakes.

“Hopefully, that will buoy the market going forward,” Strohl said. “There’s a lot of small-business economics that are still going strong.”