Strong demand for logistics real estate continues

Demand for logistics real estate is reaching record highs as retailers boost inventory levels to protect against supply chain disruptions, and e-commerce activity continues its strong pace.

Mid-year outlook reports from some of the industry’s largest commercial real estate firms are forecasting tight market conditions for warehousing and logistics space amid the heightened demand, which they say is widespread.

“Demand is spread across many industries, and e-commerce remains a strong driver,” according to officials at logistics real estate firm Prologis, which released data based on customer activity in its Industrial Business Indicator (IBI) report earlier this month. “With no signs of abating, we expect tight market conditions to persist through 2022 and likely beyond.”

The report showed that supply is having a tough time keeping up with logistics demand. Market absorption in the first half of the year was 194 million square feet (MSF), more than double the same period last year, according to the report. Logistics real estate vacancies fell to 4% in the second quarter, and Prologis said it predicts rent growth above 10% in 2021. Top rent growth markets include Southern California, New York/New Jersey, and Pennsylvania.

“Customer activity is setting records, with Prologis’ IBI activity index rising from 59 in Q1 to 71 in Q2. These results indicate sustained robust activity as supply chains race to restock amid rapid consumer purchasing, in turn creating strong future demand,” the report’s authors wrote. “Logistics demand reached a record quarterly high of 110 million square feet (MSF) in the second quarter, bringing absorption for the first half of the year to an unprecedented 194 MSF, more than double from the same period last year. Demand was broad-based across a range of customers, with urgency to secure space a major factor.”

Commercial real estate giant CBRE released similar results in its mid-year global outlook earlier this month, noting that the economic recovery is progressing in the commercial real estate market despite concerns about Covid-19 and inflation—a boon to investors and property owners. According to the outlook, 2021 will be the strongest on record for the commercial real estate sector.

“Retailers and others will increase their inventories to cushion against major disruptions. More companies will outsource their supply chain operations, which means third-party logistics companies will claim an even larger share of leasing activity,” according to CBRE.

A third report, from Transwestern Real Estate Services (TRS), showed that the industrial real estate market posted 102.2 MSF of positive net absorption in the second quarter, a third straight quarterly gain. Leading markets include Atlanta, Chicago, Dallas-Fort Worth, and California’s Inland Empire, according to Transwestern’s second-quarter U.S. industrial market report.

The conditions are creating opportunities in secondary markets, the firm said.

“The industrial sector is once again firing on all cylinders, making it increasingly difficult to find suitable space in prime industrial markets,” Matt Dolly, research director at Transwestern, said in a statement. “High rents and supply chain issues are making secondary logistics markets increasingly attractive to occupiers and investors, and we’re closely following markets such as Savannah, Las Vegas, Charleston, Phoenix, and San Antonio, all of which have experienced expansionary conditions over a three-year period.”