Prologis Says 'Frenzied Pace' in Logistics to Normalize in 2023

Gemerchak - Nov22

Originally published by GlobeSt


The “frenzied” tempo of logistics leasing momentum of recent years is forecast to “normalize,” according to Prologis’ quarterly Industrial Business Indicator (IBI) and True Months Supply (TMS) research report issued last week. 

Prologis said the pace of decision-making has already slowed “and is not expected to reaccelerate due to greater economic uncertainty.” 

The firm added that users will have more options as the construction pipeline empties. 

Compared with 2022, Prologis “expects more deliveries and slightly lower net absorption, roughly in line with the annual demand run rate at the current level of IBI activity.” 

Market rent growth is expected to outpace inflation, TMS is expected to rise and the vacancy rate is expected to expand. 

“Taken together, competition may ease in some places, but planning will be pivotal in key locations where options should continue to be limited. 

Stuck in Pipeline, Supply Getting Delivered 

Prologis’ research showed that competition for limited available space continued in the US and the vacancy rate was at 3.1% in Q3, up 10 bps from the prior quarter with rents increasing 6.2%. 

“Supply that was stuck in the pipeline is finally being delivered, with 105 MSF of new supply in Q3, up 25 MSF from the prior quarter,” the report said. 

Max Bosso, VP/Real Estate Development, Ryan Companies, tells GlobeSt.com that the numbers and overall trends vary from region to region, but uncertainty is a common denominator in many markets right now. 

“In Florida, it’s causing end users to take a bit longer in signing leases or making go/no-go decisions, but leases are still being executed,” Bosso said. 

“This pattern is pushing out leasing and occupancy timelines for existing spec facilities and also has a trickle effect since interest rates and exit caps are the other two major issues for developers that are opting to slow down on starting new projects. 

“Those projects are still happening, just at a slower pace due to a more deliberate strategy with location, purchase price and timing allowed by the PSA. 

“Absorptions are still outpacing new starts, which is the light at the end of the tunnel. If this trend can continue for the next 12-18 months, or until the Feds stop raising interest rates, then we will be home free and avoid a major recession. 

Companies Trying to Shorten Their Supply Chain 

Rob Gemerchak, investment sales broker and industrial specialist at Northmarq following the acquisition of Stan Johnson Company, tells GlobeSt.com that as the vulnerabilities of the global supply chain persist, companies continue to consider strategies to shorten their supply chain, which in turn drives demand for additional production and distribution facilities within the US. 

“While many headlines have referenced Amazon’s slow-down in the pace of their distribution network expansion, the overall market demand for distribution space has remained at record levels through 2022, with corresponding increases in rent growth,” Gemerchak said. 

“This rent growth is expected to continue in 2023 as the demand for distribution space, coupled with higher debt and construction costs, will maintain the pressure on base rental rates. From an investment perspective, there remains liquidity and motivated capital on the buy-side as net lease industrial assets remain in high demand and continue to grow as a favored asset among investors.” 

Moody’s Uncommon and Astonishing Numbers 

Ermengarde Jabir PhD, associate director – senior economist, Moody’s Analytics, tells GlobeSt.com that industrial remains at the top of the CRE sectors. 

“Developers have responded positively to robust demand, but new construction has been unable to keep pace with demand because of increasing land and materials costs, hence declining vacancy rates,” she said. 

Completions in 2020 reached a record high although completions are expected to be lower in 2022 as construction activity has slowed, she said. 

“This is due in large part to inflation that has caused a surge in the cost of raw materials as well as the higher cost of borrowing resulting from interest hikes intended to curb inflation,” Jabir said. 

Quarterly completions have declined each quarter since the third quarter of 2021 and the pullback in new square footage coming online is ongoing, with just under 20 million square feet of new supply added to the warehouse/distribution pool in the third quarter, she added. 

Despite steadily declining business confidence over the past year and looming fears of an impending recession, Jabir said that the tightening of new supply supported a healthy decline in the vacancy rate in the third quarter of 110 basis points. 

“This quarter’s new record-low vacancy rate of 3.9% is so uncommon for warehouse/distribution that, although records have been set each quarter since 2021 Q3, the next lowest recorded vacancy rate prior to the past five quarters of successive record low vacancy was 9% in the third quarter of 2017. 

Effective rents continued to propel upward, increasing by an astonishing 5.6% in the quarter. 

Supply Chain to Be ‘Caught Up’ By End of Q1 2023 

Adam Roth, executive vice president of industrial services at NAI Hiffman and director of NAI Global Logistics, tells GlobeSt.com that the supply chain is projected to “catch up” at the end of first-quarter 2023. 

“However, geopolitical concerns and transportation uncertainty have impacted how corporations assess risk,” he said. 

“In the short term, just in time has become just in case, which will subside over time as the sting from the COVID supply chain bullwhip dissipates. Nonetheless, the need to reduce length of haul and shorten the supply chain where possible will be the long-term takeaways from the recent snarl in logistics. 

Avison Young: NJ Vacancy to Remain at Historic Lows 

Looking specifically to New Jersey, Avison Young’s Q3 report showed that inventory levels have steadily risen throughout the year, with a busy development pipeline set to deliver late 2022 and early 2023. 

Meanwhile, vacancy has risen less than half a percentage since last quarter and is expected to stay at historical lows through year end. 

Phoenix Picking Up Those Squeezed from SoCal 

CommercialEdge reports that Phoenix currently has the largest supply pipeline on a stock basis and the second largest in terms of square footage, as it continues to attract an increasing number of industrial players squeezed out of Southern California. 

Phoenix had nearly 45 million square feet of new industrial space under construction as of late September, the equivalent of 15.1% of its existing stock. Moreover, the market’s planned projects could more than double that pipeline for a full increase of 31.7%. 

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