Industrial Development Lags Current and Future Demand

According to industrial CRE giant Prologis, its Industrial Business Indicator Activity Index showed an April level of activity “consistent with demand generation, supported by macro data that reflects restocking inventories amid resilient consumption activity, although realized net absorption has lagged.”

However, that is paired with a continued reduction of industrial construction, setting up an ongoing and future lack of supply, with greater competition for space in 2025 and, presumably, rents rising.

The IBA Activity index was 56.3 in April, down from a 58 average present in the first quarter of the year. According to the company, macro drivers of activity were “solid” with core retail sales showing 1.1% month-over-month growth in March and a 4.5% year over year. “Adding to demand drivers, the more logistics-intensive e-commerce channel outperformed with 2.7% month-over-month and 11.3% year-over-year growth while in-store sales grew 0.4% month-over-month and 2% year-over-year in March,” they said.

Facilities utilization was about 85% in both March and April. That’s up from a low of 83% in the last quarter of 2023.

“Despite a strong rise in import volumes, sales outpaced inventory growth, pushing down the inventory-to-sales ratio to 1.24, approximately -3% below the 2019 average. This points to further need to build inventories, particularly for wholesalers.”

A lack of warehouse space could also have more extended impact on logistics, leaving less room for products coming into the country.

The company also noted that net absorption of 26 million square feet underperformed what might have been expected. “IBI readings and macro data suggest logistics real estate demand growth should be higher than what was realized in Q1,” they said.

Prologis pointed to two major but temporary factors. One was that some customers had been able to accommodate growth using capabilities in their existing networks, which the lower utilization rates and a rise in sublease space in some markets indicated. But there are likely only one or two more quarters worth of extra space left, as the 84.4% April utilization rate was below the more typical 85% to 86%. In addition, sublease space growth slowed everywhere other than Seattle and Southern California.

The second factor was economic uncertainty and an emphasis on cost control delaying decision making. “Evidence of this trend includes extensive property tours, longer deal gestation times and delayed occupancy dates, even with a rise in proposal activity,” they wrote.

With Q1 deliveries down by more than a third from 2023 Q4, there’s an end to record completions with tight construction financing and costs.

Prologis estimates that the result of accumulated pent-up demand and fallen construction of new supply will mean peak 2024 vacancy in the mid-6% range, which will fall to mid-5% in 2025.