A recent report published by San Francisco-based real estate investment trust company Prologis stated that “logistics space in the U.S. is effectively sold out.”
While that could be viewed as an alarmist take, it is clearly not, for the simple reason that it is 100% accurate. And the company explained in its Industrial Business Indicator (IBI) report, a quarterly survey of customer activity and sentiment, that the pairing of strong retail sales and supply chain challenges are subsequently driving what it termed urgency in leasing. It also bears keeping in mind that this is coming from Prologis, the largest owner of industrial real estate holdings, at around 1 billion square-feet.
That was driven home by U.S. net absorption hitting a new record 115-million square-feet, in the third quarter, and 280 million square-feet year-to-date (more than doubling the tally for the same period a year ago), while driving down vacancy rates to a new low of 3.9%.
The former point truly drives home how dire the current search for space by (potential) occupiers really is, with the report noting: “What is available is increasingly more expensive. Logistics customers must move fast to lock down space.”
That was also reiterated, in the report, by how “extreme competition for modern product” has seen rents up 7.1%, on average, from the second quarter to the third quarter. This is occurring at a time when construction pipelines are at all-time highs amid construction delays and also record pre-leasing highlighting space shortages.
“Demand reached another record high, driven by structural and cyclical trends,” the report observed. “Structural forces are supporting demand and will for years to come as e-commerce penetration rises and companies build resilience into their supply chains. Retail sales are robust, and trillions of dollars in pent-up savings and record high consumer net worth should support future spending growth.”
At last week’s “Groundbreakers 2021: Breaking New Ground” conference hosted by Prologis last week, the company’s CEO Hamid Moghadam explained that the need for warehouse availability and capacity, driven by ongoing levels of high demand, are also up against concerns of people and businesses not wanting warehouses in close proximity to their neighborhoods.
“There are concerns like diesel and traffic congestion, and I think, over time some of those issues will be addressed by things like autonomous and electric vehicles, things that are cleaner and can run at off hours of the night,” he said. “Those are really long-term solutions, but, at the end of the day today, what we can do is densify sites, maybe go multi-story, take some property types that were formally retail or office [space] and convert them to logistics facilities. We are doing pretty much everything we can. Parking lots are getting converted, and also parking structures. There is no one solution, we need to look in many different places.”
The current situation reflects a major challenge for companies to identify and take down needed distribution space in critical markets, which is becoming a much more strategic issue for companies, according to Rich Thompson, head of the global Supply Chain & Logistics Solutions consulting team for Jones Lang LaSalle (JLL).
“It used to be ‘let’s figure out where we need to be and go get the real estate,’ and that was considered an easy to do type of thing,” he said. “They could get boxed out today if they are not careful.”
This data and sentiments speak to one of the many concurrent supply chain and logistics challenges shippers and providers are collectively facing these days. These challenges won’t last forever but are not going away anytime soon either. It is hard to say where things go from here but it requires a watchful eye.