How Prologis Calculated That Industrial Rents Will Rise 22% This Year

Prologis Research has issued an updated industrial outlook for 2022 that increases its industrial rent-growth forecast for this year to 22%.

Prologis said unprecedented “pent-up” demand for warehouse space due to e-commerce growth and inventory restocking will continue to outpace supply and new construction, holding industrial vacancy rates in 2022 at a record-low 3.3%.

Prologis said it modeled a 5% slump in sales of goods into its forecast—as well as the impact of Amazon’s recent revelation it has too much warehouse space—and still concluded that the industrial market needs 800M SF of new space to cure the current shortage and allow retailers to bring inventories back up to pre-pandemic levels.

Prologis cited the impact of inflation on logistics networks and supply chain disruptions that are delaying deliveries of new construction as key factors that will continue to propel industrial rents higher.

“Ongoing supply chain disruptions will put downward pressure on logistics real estate deliveries. 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. These forces, coupled with rapid growth in Q1, prompted (us) to increase our 2022 rent-growth forecast,” the Prologis Research team said.

Prologis lowered its previous forecast for industrial space completions due to supply chain disruptions that are delaying construction and deliveries. The research team said the slowdown in pipeline deliveries, as well as record demand, would keep vacancies at record lows throughout 2022.

“We forecast 375M SF of completions in 2022, down from our prior forecast of 400M SF due to the increased likelihood of extended supply chain-related delivery delays. At 360M SF of net absorption, demand will keep pace with new supply in most locations, and leasing conditions will remain challenging for customers looking to expand,” the Prologis team said.

Prologis conceded that building more multi-story warehouses—which the logistics giant pioneered in 2018 with its Georgetown Crossroads project in Seattle—is not an overall solution to the industrial space crunch.

Prologis said that multi-story warehouses will be limited to markets that can support rents as high as $30 SF that are needed to amortize these facilities. Industrial rents averaged nearly $9 SF in Q1, according to CBRE.

Prologis’ Q1 IBI Activity Index reported that record industrial demand held steady at an annual demand run-rate equivalent to 320M SF, driven by consumer spending and the rebuilding of inventories.

“The flow of goods has opened as supply chain bottlenecks ease. The IBI utilization rate increased steadily to 85.5% in March from less than 85% in the previous quarter,” the Q1 activity report stated.

However, the Q1 report added, “retailers still do not have enough stock on hand; inventory-to-sales ratios were 1.11 in February, nearly 10% below pre-pandemic levels.”

Prologis Research said it factored Amazon’s suddenly overextended logistics network into its calculation that demand will continue to outpace supply, noting that Amazon’s share of e-commerce  is roughly 40% and other e-commerce players are busy expanding distribution networks.

Earlier this month, Amazon sent shockwaves through the US economy by revealing during a Q1 earnings call that it has overextended its distribution network and now has a glut of underused warehouse space due to slower-than-expected growth in e-commerce. Amazon posted its first quarterly loss, nearly $4B, since 2015.