Industrial Vacancy To Remain At Historic Lows After Banner Year

Logistics real estate posted a record-setting year in 2021, driven by intense competition for space that pushed rents to new heights. 

The Prologis IBI (Industrial Business Indicator) Activity Index rose to 67 across the 29 US markets the firm tracks in the fourth quarter; a number above 50 indicates growth, Prologis says.  Rents ticked up by 6.5% over Q3 figures at 20.4% annually, and logistics tenants snapped up 120 million square feet of space in the fourth quarter. Overall, absorption hit 410 million square feet in the quarter, a record, and is up 85% over 2020 numbers.

Prologis says that low supply will continue to drive competition for suitable space: “Of the 390 MSF of construction now in the pipeline, most will be spoken for upon delivery given current pre-leasing volumes,” the firm notes in a new analysis, adding that around 70% of new supply is already pre-leased. And despite 270 million square feet of new supply, vacancies still fell 160 basis points in 2021 to an all-time low of 3.4%.

In the third quarter, Prologis CEO Hamid Moghadam was blunt in his assessment of the sector’s supply and demand imbalance: “With vacancies at unprecedented lows, space in our markets is effectively sold out,” he said on an earnings call. 

And now, the firm also suggests that space utilization, which remains below historic highs at 85%, still points to what it calls “ongoing logjams” in the supply chain.

“The inventory-to-sales ratio is more than 10% below pre-pandemic levels and there is no ‘shadow space’ (technically occupied but marketed for lease) to absorb inventory right-sizing,” the firm notes. “Prologis believes supply chains will have to expand by 15% or more to accommodate normal inventory levels and foster resilience against future disruptions.”

Finally, the firm predicts net absorption of 375 million square feet and completions of 400 million square feet will keep vacancy at historic lows.

“US market rents should increase by another 10 percent in our base case,” the firm predicts. “We expect that supply chain disruptions will persist into 2023, which could amplify competition for even fewer vacant space. As we’ve noted before, logistics customers who move quickly to secure prime space in this tight market will reap the competitive advantage.”