Why Prologis is Able to Lift Its 2022 Rent Growth Forecast to 25%

A new analysis from Prologis shows that the industrial sector is seeing a drop in vacancy rate to an average national record low of 3.1%. 

Given how industrial has performed over the last few years, that might not seem remarkable at first blush, but there have been indications of factors that create demand slowing. For example, Amazon was reported dropping 5% of the warehouse space it snagged during the pandemic. And e-commerce sales as a percentage of total sales have dropped from the 2020 Q2 high of 16.4% back down to 14.3% in 2022 Q1. It’s roughly in line again with the pre-pandemic growth curve.

And yet, Prologis said that in the second quarter, the low vacancy helped drive up rents by 6.9% because demand was higher than supply.

One reason is that new industrial facilities are facing the same significant roadblocks to construction that all commercial real estate has experienced. Although prices on some key components and materials have begun to recede, there are still significant supply chain delays. Complicating the question of when materials will ultimately arrive is the paucity of construction labor as well as shortages of land

These factors together have been significantly delaying projects of all types. According to Prologis, 100 million square feet of space was absorbed but only 73 million square feet of new logistics space was delivered.

“The amount of space under construction increased to 468 million square feet as projects remain stuck in the construction pipeline,” the report said. “Starts remained elevated at 112 million square feet.”

And yet, as the firm points out, there has also been easing of supply chains in some industries and product types, letting wholesalers, retailers, and manufacturers rebuild inventories. Industrial business activity “increased 140 bps from the prior quarter to 66.4 in Q2,” according to Prologis. “Logistics users continued to expand their distribution network, absorbing 100 million square feet of space in 2Q, up from ~90 in 1Q.”

The increased use meant utilization rising by 10 basis points between quarters to 85.6%. “The long-term average rate is 85%, and the functional ceiling is in the 86-87% rate,” Prologis wrote.

“Market conditions to remain challenging through the near term,” noted the report. “Low TMOS [true months of supply] corresponds to strong rent growth and, along with rapid year-to-date increases, caused Prologis Research to lift our 2022 rent growth forecast to 25%. The strong IBI reading equates to an annual demand run-rate of almost 370 MSF, in line with our 2022 forecast for 375 MSF of net absorption. Deliveries should catch up with demand by year-end, keeping the vacancy rate at 3.2% – stable from year-end 2021.”