Industrial Market in Transition as Demand Grows But Supply Falls

A brief window of opportunity is open for logistics companies to secure high-quality space to meet growing and shifting consumer demand before slackening supply limits their options.

Demand within the market is growing as evidenced by Prologis Research’s U.S. Industrial Business Indicator. The study found consumer activity increased by more than two points in July to 60.6 from its Q2 average of 58.4 as consumption of goods remained stable and inventories were restocked. This is consistent with healthy consumer activity and was driven by a 3% year-over-year increase in retail sales, particularly electronics, apparel and motor vehicle parts.

E-commerce sales grew 8.6% year-over-year, compared with 1.2% growth for in-store sales

Prologis attributed this growth to cooling inflation and real wage growth, both of which relieved pressure on consumers. In addition, imports have been growing by double digits, which suggests inventories will increase during the second half of the year.

Many users are determined to maximize existing space to focus on productivity and cost control, which is leading to modestly below-normal realized demand patterns. Net absorption in the logistics sector amounted to 46 million square feet in the second quarter, a positive trend but below a normal expansionary average of 60 million square feet, said Prologis.

However, leasing activity is poised to increase as customers expand their footprints to meet the needs of consumers. Indicators of growth such as customers in the market and proposal activity signal growing competition for space, at least throughout the remainder of the year. Prologis said its analysis suggests a run rate of 180-200 million square feet over the next 12 months.

This demand could be hampered as a post-pandemic building boom is coming to an end, with only 46 million square feet of new speculative developments breaking ground during the second quarter, a decrease of 28%. That will leave customers with dwindling options in many locations and size categories. Elevated construction costs and interest rates, as well as challenges to securing approvals and permits, remain ongoing headwinds to an acceleration in development starts.

Prologis said it expects net absorption of space to accelerate gradually during the second quarter, with vacancy rates peaking in the mid-6% range this year before decreasing in 2025. Rent growth should follow a similar trajectory, with select markets recording lower net effective rents through year-end before upward pressure returns in 2025, said Prologis.