The logistics real estate market is in flux due to the potential impacts of recent policy and economic initiatives coming out of Washington. Demand in the sector is primarily driven by consumption, and tariff-related uncertainty is shaping customer behavior in real time, according to a Prologis report on the industrial sector.
Prologis draws its insights and predictions about the sector from Industrial Business Indicator (IBI) readings and direct feedback from logistics users. Recent feedback suggests logistics providers are currently accelerating or have already accelerated imports to mitigate tariff exposure. Many are prioritizing agility and overflow strategies as customers respond to macroeconomic volatility with capital expenditure and real estate decision delays until policies become clearer.
During the first quarter, industrial leasing pipeline volumes were up, as were transactions, driven by customers in key sectors including food and beverage, consumer products and transportation, said Prologis. Progress stalled somewhat after April 2 as long-term supply chain investments were scrutinized amid proposed tariffs.
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“That said, we see a market that’s still active,” said Prologis. “Many leases have moved forward since that date, including for short-term solutions to manage volatility and long-term build-to-suit investments tied to structural supply chain needs and underlying growth in customer businesses.”
Space utilization has increased moderately due to both recovery and a shift in inventory strategies this year, said the report. The IBI utilization rate rose to 85.1% in April from an average of 84.6% during the prior two months. Despite near-record import levels last year, healthy retail sales, lean inventory practices and spare warehouse capacity have kept utilization lower than normal, but the utilization rate has been rising in recent months.
Meanwhile, the IBI activity index reflected slower growth of 54.4 after 19 months in the high 50s and low 60s. Any reading greater than 50 signals growth; however, the drop represents a slowdown in a difficult planning environment, according to Prologis.
Market rents decreased at a slower pace in Q1 and varied by region. Rates held roughly steady in the Midwest, Sunbelt and along the East Coast, while pricing in Southern California remained weak, the report said.
Prologis expects deliveries to contract further during the coming quarters and remain historically low into next year. The under-construction pipeline is now 25% below 2019 levels, and rising development costs have widened the gap between market rents and replacement cost rents. This has put a damper on speculative construction starts and will put upward pressure on rents when conditions normalize, said Prologis.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
