Industrial Rent Expected to Grow 6.5% This Year, Prologis Predicts

Rent growth for industrial properties will accelerate through 2021 to 6.5% for the full year, Prologis Research has predicted.

In addition to fueling the rent increases, robust demand could lead to an acute lack of logistics space, the company noted.

“Taken together, these trends likely portend a challenging leasing environment through the near term, making advanced planning for upcoming requirements crucial for successful network expansion,” Prologis advised.

Improving growth prospects across diverse customer segments will drive strong demand but leasing could be constrained by a lack of new supply.

“Urgency to secure space, along with limited availabilities and rising replacement costs, should drive up market rents through the rest of the year in most locations,” Prologis said.

Demand is being driven by the surge in e-commerce and healthy activity in a range of other consumer industries such as food and beverage.

As retail sales rise from stimulus efforts and job growth boosting consumer confidence merchants are restocking is underway, as seen in elevated port volumes.

Space utilization ticked up to the high-84% range in April. Although strong sales, lengthening delivery times and port congestion continue to drive historically low inventory-to-sales ratios, utilization is on the rise as goods make their way through the supply chain, the research firm reported.

“Outsized demand relative to new supply is prompting significant competition for new space, with customers placing a premium on quickly securing prime logistics space,” Prologis said.

This has led to the vacancy rate falling by 10 bps to 4.7% from the prior quarter, reaching pre-pandemic levels, and driving rent growth of 2.4% quarter-over-quarter.

Construction starts increased in the first quarter 25% year-over-year, according to the firm—the highest quarterly volume since the company began tracking.

The REIT notes that the pace going forward in 2021 is not likely to overshadow demand.

The company said it expects 300 million square feet of completions this year, with the bulk toward the end which will quickly find tenants and keep the vacancy rate stable at 4.7%.

The proportion of spec starts increased to the 80% range after averaging 70% in 2020.

However, Prologis cautioned there is pullback in new speculative construction.

“Replacement and land costs are rising and supply chain bottlenecks (especially for structural steel and timber) are lengthening construction timelines, possibly limiting future deliveries,” the company said.