Logistics Sector Activity Normalizes in Third Quarter

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The industrial sector has been breaking records quarter after quarter, but conditions are finally beginning to normalize on the heels of the unsustainably high numbers recorded in 2018, according to Prologis’ new U.S. Industrial Business Indicator, a proprietary survey of customer sentiment.

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The neutral mark on Prologis’ IBI activity index is 50 and for most of the first three quarters of 2019, the figure steadied at approximately 60, signifying healthy sustainable growth in the flow of goods through U.S. facilities. Essentially, demand for logistics real estate remains robust. Utilization of logistics space held steady near its historic average of 85 percent. This resilience is driven by positive consumer fundamentals including employment and wage growth, even as certain business-centric indicators have deteriorated, according to Melinda McLaughlin, head of U.S. research with Prologis, who commented in a video on the latest IBI.

The strength of demand is further evidenced by the vacancy rate’s position near its historic low of 4.5 percent, and now supply is responding to that demand. Completions in the third quarter increased and were in line with net absorption, which totaled approximately 75 million square feet. Over the last year, large-box projects comprised the bulk of new product, however, the number of smaller-box developments under 300,000 square feet went on the upswing, particularly in lower-barrier markets like Phoenix, Reno and Ohio. “With vacancy rates at very low levels, especially for small and mid-size product, supply is clearly responding to demand beyond the big box,” said McLaughlin. Further mitigating the risk of oversupply, roughly 50 percent of development that commenced over the last four quarters centered on just six markets: Dallas, Houston, Chicago, Atlanta, Pennsylvania and the eastern area of the Inland Empire. Lately however, supply is rising in smaller multi-market distribution hubs, serving as an additional indicator of the supply side’s responsiveness.

Year-end expectations

Prologis foresees the balance between supply and demand holding for the rest of the year. The firm projects that at the close of 2019, net absorption will reach 225 million square feet and completions will total 240 million square feet. Additionally, industrial property users can expect to see rental growth remain on an upward trajectory through 2019. With hearty demand and a near record-low vacancy rate, Prologis has increased its estimate of year-over-year U.S. market rental growth for 2019 from 6 percent to 7 percent. “Looking ahead, customers should continue to expect a competitive market when planning for any future role,” McLaughlin noted.