Prologis Warns That Competition for Space Will Likely Increase Next Year
Until then competition is normalizing to pre-pandemic levels.
The frenzied pace of competition for industrial space appears to be normalizing to pre-pandemic levels and new supplies of warehouse space could ease leasing conditions – a trend that may not last long.
Prologis’ Industrial Business Indicator rose to 62.3 for the second quarter. This “reflected a better-than-expected goods economy as a majority of logistics users reported an increase in the flow of goods through U.S. facilities,” Prologis found. “Utilization on average remained in the sweet spot of 85% to 86% during the second quarter, indicating a lack of shadow space in facilities.”
Rents rose 2% in the second quarter, with a forecast rise of 7% to 9% for the year — a pace approaching pre-pandemic levels. After years of double-digit rent growth led to more than 100% rent growth in some markets, leases will experience “substantial repricing” when they expire, Prologis stated.
However, less logistics space will be available in 2024 because of a slump in new construction starts which fell a further 12% in 2Q2023. Therefore, vacancy rates, which Prologis expects will peak at 4.6% by year-end 2023 are likely to fall to 4% by the end of 2024. This is expected to result in positive rent growth “fueled by rising replacement costs, growing barriers to new supply and ongoing secular drivers to demand.”
Even so, Prologis found that the “frenzied pace” of competition for space has diminished, as the vacancy rate for the quarter rose to 4% and customers took more time to seal deals.
TMS – the amount of time it would take to absorb all available supply at the current demand run-rate – rose by 6.5 months from 1Q2023. “The uptick was consistent with normalizing operating conditions and rising rents,” Prologis commented.
But even as leasing conditions are poised to ease a little in the wake of the new deliveries, the company urges fast action. “Customers are advised to take advantage because the rapid decline of new construction starts and delayed decision-making could increase competition for space in 2024,” Prologis suggested.