Supply Chain Indicator October 2022

Industrial Real Estate Still Hot, But Access to Data is Essential

Issue 3, November 2022

Logistics real estate continues to outperform as ongoing demand pushes companies to expand their supply chain footprints. Years of ultra-low vacancy rates means customers continue to struggle to find the space they need. Softness in the broader capital markets is creating downward pressure on values and lifting return requirements, which may slow the start of new developments. 

With more severe macro headwinds, European markets may slow more quickly and significantly than in the U.S.  

Our Industrial Business Indicator (IBI), a proprietary index of customer activity levels, which is benchmarked to 50, held steady at 63.6 and remains 6 percentage points above the long-term average. Meanwhile, space utilization is near its functional ceiling, meaning basically at capacity. Both tell a growth story that should lead to new demand for logistics real estate investments. 

If you only remember three things…

1. Demand remains resilient. Our proprietary indicators of demand stayed above average throughout the third quarter as measured by our IBI and the elevated build-to-suit activity. 

2. Rent growth is a powerful offset to interest rates. Volatility in the broader financial markets is driving up costs of capital for real estate investments (logistics real estate included). The saving grace? Significant and lasting growth in rent partially offsets the declines in those real estate valuations.

3. New speculative development is slowing. The combination of rising capital and construction costs is slowing the start of new construction. In Europe, new projects are down 30% year over year. While speculative development in the U.S. saw growth, activity in the coming months could begin to reflect the new environment of higher costs. 

Bottom line: Logistics markets show considerable resiliency as demand remains strong, underpinned by healthy structural drivers, such as e-commerce, increases in backup inventory and years of undersupply. But higher borrowing and construction costs along with macroeconomic slowdowns will create a period of uncertainty that will require constant monitoring and increase the importance of proprietary market views and data. Leading indicators, such as Prologis’ IBI, will be crucial to monitor and navigate this new, fluid environment.