Orange County Partnership - News

Logistics Giant Prologis Predicts Industrial Rents Will Increase

Prologis, a global leader in logistics, believes that in the coming months industrial rents will increase and vacancy rates will rise in the short term, before falling once again in 2024.


The company recently released its Industrial Business Indicator activity index which bounced back in April. The index averaged 59.7 in the first quarter of 2023, but readings in the last two months of the quarter coincided with broader market volatility and revealed resilience. In March, the index fell to its lowest level in 30 months alongside bank failure-fueled financial market volatility and overall economic uncertainty. The April reading increased to 56.2, a normal expansionary reading for activity, according to Prologis.


A 40% drop in construction starts points to fewer options in 2024, Prologis stated in the report. “As the current construction pipeline empties in 2023, Prologis Research expects the vacancy rate to increase to the low-/mid-4% range before decreasing again in 2024. Customers may face a narrow window to act on increased availability, particularly in the most desirable locations.” reported that the true months of supply (TMS) number—the time it would take to absorb available supply at the current demand run rate—increased to 30 months, up five months from the fourth quarter. The Prologis report indicated that the markets and submarkets with the biggest construction pipelines should have the largest TMS increases and lead to variations in availability, as well as rent growth, depending on locations.


“Macroeconomic crosscurrents may lead to some delayed decision-making, which could push demand from 2023 into 2024,” Prologis concluded. “The U.S. vacancy rate should drift up to the low-mid-4% range by year-end, well below the historic average.”


Other key take aways from the Prologis report:


·       Rents increased 4.4% in the first quarter due to persistent competition for prime logistics space. The vacancy rate ended the first quarter at 3.7%.


·       Competition for space continued in 2023, even as demand returned to more normal levels. Logistics users absorbed 60 million square feet in the first quarter of 2023, in line with the years leading up to the pandemic. IBI activity of 56.2 in April equates to an annual demand run rate of approximately 242 million square feet.


·       The utilization rate stabilized in the 85%-86% range, considered optimal for logistics users. The utilization rate averaged 85.6% in the first quarter of this year and was 84.9% in April, revealing a lack of shadow space.


·       Construction starts dropped by 40% compared with the average pace of starts from the first quarter of 2022 through the third quarter of 2022 due to increased costs and a lack of financing.


·       Prologis expects rents to increase by 10% for the year.


The report stated, “Combined with delayed decision-making and potential for improvement in the economic backdrop, the future reduction in deliveries could produce another year of declining and ultra-low vacancies in 2024. Some markets, however, could see more interim vacancies, given the abundance of speculative space under construction. Examples include Dallas, Phoenix, Savannah and Austin. Outside these select markets, vacancy rates are expected to remain below 2019 levels, given limited current availabilities and few unleased buildings in the pipeline.”


At March 31, 2023, Prologis owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 1.2 billion square feet in 19 countries. Prologis leases modern logistics facilities to a diverse base of approximately 6,600 customers principally across two major categories: business-to-business and retail/online fulfillment.