Logistics Real Estate Faces Mini-Cycle of Subdued Demand

The logistics real estate market is progressing through a mini-cycle characterized by subdued demand and near-peak cyclical vacancy as excess capacity awaits post-election supply chain decisions.

Excess logistics facility capacity in the United States is limiting growth and is reflected in the IBI Utilization Rate coming in below normal levels at 84.4% in Q3, according to Prologis’ November industrial report. Utilization started this year below 84% and climbed gradually as supply chains replenished. Absorption totaled 40 million square feet during the third quarter, down 34% from typical levels, said the report.

Subdued demand for new logistics real estate has persisted despite healthy GDP and consumption growth. The economy has experienced robust retail goods sales and inventory replenishment, which boosted activity in operational logistics facilities. The IBI Activity Index, which has hovered around 60 since June, reflects the steady movement of goods through facilities even as utilization and the inventory-to-sales ratio remained low by historical standards.

“Looking ahead, continued sales growth under a ‘soft landing’ economic scenario will allow logistics real estate users to grow into excess space in 2025 and eventually restore the relationship between macro indicators and new demand for space,” said the report.

Average rents were down about 3% during the quarter, led by declines in Southern California where outsized volatility during the pandemic has spurred a prolonged recovery despite limitations on new supply and the region’s crucial role in global supply chains, according to the report. Rent growth patterns in other areas varied. Houston, Atlanta and Nashville had positive rent growth on a more stable cycle during the past few years. Replacement cost rents are about 15% higher than current market rates, which should help rent growth accelerate in the medium term as market vacancy recovery emerges, said the report.

Some owners are increasing concessions and lowering headline rents on new leases to counteract prolonged decision-making timelines and sluggish demand, Prologis said.

Vacancies were at or near peak levels in Q3 at 6.8%. Prologis said vacancy is likely to remain near its cyclical peak through the first half of 2025 as occupier decision-making gradually picks up. Improvements in demand will coincide with falling new supply. Completions decreased 33% quarter-over-quarter in Q3 to 66 million square feet. This is down 49% from the peak of the 129 million square feet completed during Q3 2023.

“This contraction in new supply is likely to extend through 2025 as development starts fell by 20% year-to-date in 2024 compared to pre-pandemic levels,” said the report. “As a result, the pipeline of space under construction is at its lowest since 2017.”