The new edition of the Industrial Business Indicator (IBI), which was recently issued by San Francisco-based real estate investment trust company Prologis, highlighted some different market challenges, regarding United States-based logistics facilities.
The third quarter IBI Utilization Rate came in at 84.4%, which it said is below what it considers normal levels in the 85%-to-86% range and reflects spare capacity. The firm added that with existing space to grow into, new logistics real estate demand was subdued, even as GDP was solid.
Prologis defines the IBI as a survey of customer sentiment focused on customer activity in warehousing.
Other key takeaways of the IBI included:
- Average market rents declined by approximately 3% in Q3, led by declines in Southern California. Prolonged decision-making timelines and sluggish demand are prompting some owners to increase concessions and lower headline rents on new leases, although trends vary widely by market;
- Vacancy is likely to remain near its cyclical peak through the first half of 2025, with developer starts off 20% year-to-date compared to pre-pandemic levels, as occupier decision-making gradually picks up pace through 2025. Vacancies were at or near peak in Q3 at 6.8%. Improvement in demand will happen against a backdrop of falling new supply: Completions decreased 33% quarter-over-quarter in Q3 and will remain low through 2025;
- Excess capacity built during the pandemic for resilience but now leveraged for cost control has weakened the link between leading economic indicators and real estate demand, with Q3 net absorption, at 40 million square-feet (MSF), off 34% compared to normal levels;
- Q3 vacancies, at 6.8%, are approaching peak levels, with completions down to 66 MSF in Q3, a 33% decline from the second quarter and off 49% from the Q3 2023 peak, at 129 MSF; and
- Development starts are down 20% year-to-date compared to pre-pandemic levels, with the pipeline of space under construction at its lowest level since 2017
Melinda McLaughlin, Global Head of Research for Prologis, told Logistics Management there are a few things to consider, in terms of how long it may take for the current amount of excess capacity to be absorbed.
“Today, market fluidity is heightened, and cautious sentiment is weighing on decision-making; this makes it extra difficult to estimate a timeline for recovery,” she explained. “That said, should consumption remain healthy and space givebacks stabilize and trend back toward normal levels, as we would expect in a soft-landing scenario, we estimate that utilization will recover to more normal levels in two-to-four quarters.”
To read more insights, read: Soft landing scenario could lead to rent growth as demand-supply imbalance stabilizes, says Prologis
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