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  • TLT.USA
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    0.070
    2.1%
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    3.210
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    -2.1%
  • WAIT.USA
    121.000
    1.000
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FinanceNewsSupply ChainsWarehouse

Prologis sees logistics space in short supply by early 2021

Prologis expects 295 million square feet of new completions in 2020

A tightening logistics warehouse market could lead to a shortage of space as soon as early 2021, according to a new logistics real estate report from Prologis Inc. (NYSE: PLD)

The San Francisco-based real estate investment trust’s research team concluded the uptick in demand for logistics space was centered on three primary catalysts: Increased confidence has boosted demand for leasing; the macro data suggests consumer consumption and COVID-19 can coexist; and there is improved visibility on the need to reconfigure supply chains to carry more inventory and accommodate rising e-commerce demand.

The report said that high demand and low vacancy rates spurred market rental growth during the third quarter, erasing rent concessions implemented during the second quarter.

“The contraction in the development pipeline means that available options for customers looking to expand could narrow quickly, particularly in locations with high barriers to new supply. Perhaps, more than ever, planning well in advance for logistics needs could become a source of competitive advantage,” the report stated.

The increase in logistics real estate demand is largely due to surging e-commerce demand and the need for more final-mile delivery capacity. The pandemic continues to accelerate these trends as more consumers increase their spending on hard goods, which require storage and shipment, versus services. Additionally, many supply chains are being moved closer to the end consumer to improve delivery times.

“Rebounding activity and a falling supply pipeline could lead to a critical shortage of space in early 2021,” said the report.

The company’s Industrial Business Indicator (IBI) Activity Index, a survey of customer activity, climbed to a reading of 59.1 in September, which is “in line with strong growth.” The index has seen four consecutive months above 50, implying growth in demand.

The September survey found that only 2% of respondents were still reporting operational outages related to COVID-19, down to one-third of the level registered during the depths of the pandemic.

The index fell to 25.8 during the COVID trough and now stands near pre-COVID levels of early 2020.

Chart: Prologis Research

The report said third-quarter logistics real estate leasing activity improved across various facility sizes and sectors of the economy. Demand from e-commerce-related companies and third-party logistics providers “remained above pre-pandemic averages.” Leasing related to e-fulfillment accounted for 37% of all new leasing in the third quarter, well ahead of the normal average of 21%.

Facility utilization remains in a tight band, between 84% and 85%, which is near capacity.

New supply of 89 million square feet kept pace with demand during the quarter, with the vacancy rate remaining low at 5%. Market rents grew 2% in the quarter.

“At year-end, we expect vacancy of 5.0% and full-year 2020 rent growth of 2.5%, which reflects a much faster return to growth than anticipated; this growth is driven by strong demand for space,” the report said.

Net absorption increased 65 million square feet, with strength being seen in key supply chain regions and heavily populated areas like Southern California, New Jersey, New York, Dallas and Atlanta. Prologis increased its net absorption forecast to 210 million square feet for 2020, up from the prior forecast of 160 million square feet.

Total construction starts were down 17% year-over-year but increased 23% sequentially in the third quarter. Speculative starts are down 10% year-to-date compared to 2019 with build-to-suit activity up 24%. Property deliveries are expected to remain elevated throughout 2020 given projects undertaken prior to the pandemic.

Prologis Research expects 295 million square feet of new space to be delivered to the market in 2020, with new supply “poised to slow in early 2021.”

Click for more FreightWaves articles by Todd Maiden.

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.

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