Prologis Predicts Industrial Vacancies to Reach Historic Lows Next Year

Companies in search of logistics space would be well advised to act soon, even though a significant amount of new space was added to the market in Q3 2023 from projects begun in 2022 and the national vacancy rate rose.

That’s the advice of Prologis in a new report. It predicts that the logistics space now available won’t last long and rents will rise significantly as construction declines.

Its Industrial Business Indicator (IBI) measure for Q3 showed continuing consumer demand and growth in the flow of goods, pushing up warehouse space needs. Yet even though market vacancies rose to 4.8% in the period, that was low compared to the historical average increase of 6.1%. “Logistics real estate dynamics remain tight in most markets,” it reported.

That is not good news for occupants. They can expect significant rental rate increases when leases expire. That will follow rent growth of 85% from 2019 to Q3 2023, even though the pace of growth is “normalizing” compared to 2021 through 2022.

Indeed, rent growth outpaced inflation in aggregate, though this varied by market. “We expect approximately 7% growth in 2023, as rents in many markets are on pace to increase by 10% or more in 2023,” the report cautioned. However, some markets like Southern California, Houston, and Indianapolis saw flat or declining rents.

Meanwhile, higher interest rates have forced customers to take a second look at their capital expenditures and inventory carry, taking longer to make decisions. “This slowed the pace of leasing, pulling down realized net absorption to 42 million square feet in Q3 from 49 MSF in Q2, even as the volume of requirements in the market remained elevated compared to historical trends,” Prologis noted. The company’s IBI reading of 57.3 suggests an annual demand run rate of 175 million SF.

Some 121 million SF of logistics space was added in Q3. However, that was concentrated in specific size segments and locations, since eight markets account for more than half the pipeline.

Prologis expects vacancies to reach a historically low level in mid-2024. However, for 2023 it predicts demand of 195 million SF compared to 490 million SF of new supply. This would push the vacancy rate to 5.4% by the end of the year.

“We expect the window to act on the increased availabilities will be short, as speculative construction starts declined to the lowest level since Q2 2020,” the report stated. Starts have turned into stops or at least delays as replacement costs have been driven upward by rising material and labor expenses, increased capital costs, and tight lending conditions. In Q3, speculative building slumped 65% from peak levels and continues to drop. These factors could introduce scarcity in many markets.

“We recommend that customers act quickly to take advantage of increased availabilities,” Prologis summed up.