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IRE Capacity Pressure Grows

How tight is capacity getting and the warehouse sector? Prologis Research has updated its forecast for 2022 that calls for a 22% increase in industrial real estate rents for this year.

The projection followed a close look by researchers into what happened in the first quarter of this year. 1Q IRE rents increased by 8.5% quarter-over-quarter, setting a new quarterly record.

Healthy consumer spending and supply chain volatility boosted demand for logistics real estate, yet low supply reduced absorption, the global IRE firm observed. Logistics customers absorbed 88 million square feet (msf) in Q1, down from about 120 msf in the prior quarter.

At the current rate, available logistics space in the U.S. would dry up in 16 months, Prologis points out. The expansionary average is 36 months, and anything less than 50 months is consistent with positive real rent growth.

Why so high? The Prologis researchers note that the United States is a mature logistics real estate market and inventory that is tracked contains more obsolete vacant space than less mature markets such as Europe, China and Latin America.

The company said it is introducing a new proprietary measurement that is called Prologis True Months of Supply (TMS). Prologis Research said it is designed to describe the precise interplay of supply and demand more accurately.

TMS is said to more accurately capture these supply and demand dynamics by comparing all vacant spaces (existing + unleased development pipeline) to trailing net absorption.

Traditionally, months of supply for logistics real estate is calculated as the total development pipeline vs. net absorption, the researchers explain. However, this can send inaccurate signals in markets with very low vacancy (and low trailing net absorption).

According to the company, TMS is figured to be at an all-time low, and this situation reflects the challenges that now exist for all IRE customers who need to expand in a constrained market.

In addition, ongoing supply chain disruptions will put downward pressure on logistics real estate deliveries, the Prologis researchers add.

“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,” they say.

These forces, coupled with rapid growth in Q1, are what prompted Prologis Research to increase its 2022 rent growth forecast to 22%

Vacancies also are expected to continue to maintain record lows throughout the rest of this year.

“We forecast 375 msf of completions in 2022, down from our prior forecast of 400 msf due to the increased likelihood of extended supply chain-related delivery delays.”

At 360 msf of net absorption, the researchers believe demand will keep pace with new supply in most locations, and leasing conditions will remain challenging for customers looking to expand.

“Planning and acting swiftly is key to maintaining a competitive advantage,” Prologis stresses.

Other Views Are Supportive

The IRE services company JLL offers its view of the same picture from a different angle. “Given the heightened demand experienced in 2020 and 2021 and the velocity at which it is going forward, we are starting to see the first wave of a supply crunch,” the company observes.

Warehouse inventory also is aging more rapidly because of the Coronavirus pandemic lockdowns and slowing of deliveries of new construction.

Older generation buildings, or those built over 20 years ago, account for 75% of the total industrial inventory JLL also points out that compared to newer aged facilities, these buildings typically have lower ceiling heights, fewer dock doors, limited trailer parking and larger footprints.

To date, the average age of industrial product in the U.S. is around 42 years old. Sun Belt cities such as Las Vegas, Charleston, SC; California’s Inland Empire; and Austin, Texas, have younger aged buildings on average and a larger inventory of modern product from recent population growth.

Not surprisingly, some of the oldest assets are located in old manufacturing towns, such as New York, Pittsburgh and Cleveland.

Demand from industrial uses, coupled with rising demand from traffic clogged ports, has resulted in near zero vacancy rates in many urban logistics markets, JLL says. Urban coastal markets, including Los Angeles and New Jersey, and inland distribution hubs like Salt Lake City and Columbus, Ohio, have seen the lowest vacancies on record.

Over the last five years, a competitive leasing environment has accelerated U.S. industrial rent growth by 37%. “Amid the competition for space, landlords have a greater ability to command a premium for rents, the company adds. “We’ve seen a few isolated and unique situations where rents have increased by more than 50% year over year.”

Markets with the highest asking rents in the U.S. include New York City, Mid-Peninsula, Silicon Valley, Long Island and Los Angeles.

With heightened rent growth and record low vacancy on the horizon, JLL Research predicts rents will increase by more than 8% across the entire base and could be accelerated by year’s end.

Given the continuing tightening of the market, the company anticipates vacancy rates will remain below the 4% threshold. It says these trends are especially relevant for a number of coastal markets that are exhibiting the lowest vacancies on record and could potentially see significant rent increases in the coming year.

“The imbalance of supply and demand will continue through 2023 and further exacerbate the race for space,” JLL predicts This is especially true because it now takes considerably longer to complete many of these projects.

It notes that while historically the average construction timeline from start to finish was about nine months, due to current restrictions projects are now taking up to two years to deliver.

In addition, given the scarcity of land for industrial development, it says peaking land prices also are being observed across the board.

To address this, there’s been an increased focus on urban logistic sites in highly dense infill markets. Much of this demand is being driven by the need for fleet and vehicle storage, JLL says.

This is where some of those older assets may come in handy, leading to the recycling of older industrial assets: With many older buildings becoming functionally obsolete, over the next decade, these buildings will be torn down, recycled or rebuilt to be more efficient, according to JLL.

“Over the next cycle, older generation buildings will be reimagined to accommodate the end users with newer aged features such as electric vehicle parking, higher clear heights, increased truck radius maneuvering and building reconfiguration to better suit for future distribution models.” It says.

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