Several data points provided Wednesday by logistics real estate provider Prologis showed warehouse space is likely to remain constrained for some time.
A new metric, “true months of supply (TMS),” which compares current vacancies plus the development pipeline to trailing net absorption, has fallen to 16 months in Prologis’ 30 U.S. markets. Historically, that metric hovers around 36 months during expansionary periods and prior to 2021, it has never dipped below 32 months.
TMS data has an 80% or higher correlation with rent growth. A measure less than 50 months usually accompanies rent growth throughout the market.
For 2022, Prologis is forecasting TMS to average 20 months. The company expects rent growth of 22% in the U.S. during the year with vacancy rates remaining near all-time lows of 3.3%.
Logistics space remains in high demand following a sustained period of elevated consumer spending. Also, many operators have taken on incremental inventories to mitigate the disruptions that were commonplace following the pandemic’s onset.
“Ongoing supply chain disruptions will put downward pressure on logistics real estate deliveries,” the report read. “Inflation will hike up replacement costs and developers will have no choice but to charge higher rents to justify the financial outlay for new developments.”
Prologis’ Industrial Business Indicator (IBI) Activity Index registered a reading of 65 across U.S. markets in the first quarter. A reading above 50 is indicative of growth. A 65 reading in the IBI indicates annual demand for space is 320 million square feet.
“This activity reflects a stronger flow of goods and the ‘catch-up’ race by logistics users to secure limited space,” the report read.
Rent growth in the first quarter was 8.5% higher than the fourth quarter.
“Healthy consumer spending and supply chain volatility boosted demand for logistics real estate, yet low supply reduced absorption,” the report continued.
Construction delays and materials shortages slowed absorption of new space in the quarter. Logistics providers absorbed only 88 million square feet of space, which was 27% lower than the fourth quarter.
Prologis lowered its expectation for warehouse completions in 2022 by 25 million square feet to 375 million square feet in total. It estimates that 360 million square feet of net absorption will be required for demand to keep pace with supply.
Space utilization ticked higher again in the first quarter at 85.5%, versus less than 85% in the prior quarter.
The report pointed to low inventories, 10% lower than pre-pandemic levels, and the likelihood that many companies will increase merchandise levels by 10% to avoid future stockouts, as supportive of demand. Prologis estimates 800 million square feet of incremental space is required to correct current supply shortages. The estimate assumed a 5% reduction in the sale of goods.
Prologis Ventures is an investor in FreightWaves.