New Prologis report drives home the need for more warehouse space

The most recent edition of the Industrial Business Indicator (IBI), which was issued by San Francisco-based real estate investment trust company Prologis points to the need for more warehouse, due to various factors, including rising consumer confidence, retailers restocking inventories, and higher sales numbers. The IBI was featured in the firm’s report, entitled “Customer Activity Surges on Strong Retail Sales and Inventory Restocking.”

Prologis defines the IBI as a quarterly survey of customer sentiment focused on customer activity in warehousing. The first quarter IBI reading came in at 59 (a reading of 50 or higher indicates growth is occurring), up from the fourth quarter’s 56. What’s more, it rose to 68 in April, which Prologis said reflects increased throughput and also indicating strong future demand growth, too. And it also observed that utilization was almost up to 85%, with healthy retail sales keeping pace with goods restocking activity.

Other key data points identified in the report included:

• customer activity in the U.S. (the April IBI reading) jumped to the highest level since late 2018
• the Q1 vacancy rate dropped by ten basis points to 4.7%, from the fourth quarter of 2020 to the first quarter of 2021, coming in at pre-pandemic levels;
• industrial real estate rents are expected to increase by 6.5% this year;
• Q1 construction starts headed up 25% annually, marking the highest quarterly reading over the period for which Prologis has been tracking this data; and
• the proportion of speculative starts increased to the 80% range after coming in around 70% in 2020, with half of projects under construction being pre-leased

Looking at the vacancy rate, Heather Belfor, head of U.S. research for Prologis, said that the vacancy rate last rate last contracted between 2017 and 2018 when it fell by 20 basis points to 4.4%, a new historic low. Since then, she said, vacancy has steadied in the mid-4% range as frictional vacancy increased alongside speculative deliveries and demand remained healthy.

When asked for how long a period, Prologis expects demand to exceed capacity, given current industry fundamentals, Belfor said it is the firm expects that to remain the case through at least the next decade.  

“Structural demand tailwinds, including e-commerce and resilient supply chains, mean that economic growth requires more logistics space than ever before,” she said. “At the same time, rising barriers to new supply will limit the number of deliveries in the most in-demand locations.”

And regarding the 25% annual gain in construction starts, she expects that its pace will moderate.

“While investment capital is plentiful, development is more challenging than ever—land is becoming harder to find, the permitting and entitlement process is taking longer, and replacement costs are rising quickly,” she said. “Additionally, the development community is more institutional today, with a more measured approach to risk. These factors should limit the amount of new development brought online going forward.”

In order for occupiers to hedge against the lack of new space, which portends to be an ongoing, and future, issue, Belfor explained that they should plan for their future fulfillment and supply chain needs well in advance.  

“A lack of space and access to qualified labor can also help support the case for productivity-enhancing technologies,” she said. “On the supply side, increasing rents can lead to more creative and oftentimes complex projects and redevelopments. We’re already seeing, for example, the conversion of golf courses into industrial real estate. Having the operational flexibility to seek out the best space for your supply chain—even if it’s less conventional—could be another way to stay ahead of the race for space.”

To read the full report, please click here.