Business & Investment

Prologis sees further tightening of logistics real estate supply

June survey report from Prologis (NYSE: PLD) Points out some supply headwinds in the industrial real estate market, which will cause the completion of new facilities to fall below demand over the next decade.

A San Francisco-based logistics real estate investment trust research department found that land shortages, additional building requirements, increased replacement costs, and difficult permits were some of the reasons for continued tight supply and rising rents. Said there is.

Little space is available in urban areas

There is a shortage of land in industrial areas in densely populated areas.

Decades of rehabilitation efforts in metropolitan areas have transformed space from industrial to offices and apartments. Warehouses have also grown in size and have evolved from storage centers to high-volume throughput facilities. Both require more yard space.

The report states that buildings built after 2000 use 55% more land and 66% more land than buildings built in the 1980s and 1990s.

Due to population growth beyond the city center and regulatory constraints, more logistics spaces are being developed outside urban areas. As a result, the delivery distance from logistics facilities to consumers has gradually increased.

Chart: Prologis

However, as more Final Mile operators seek space in densely populated areas to reduce delivery times, the need to approach buyers increases. This puts upward pressure on the value of the city’s logistics space.

Unless incremental space is online in these markets, there is essentially little competition and rents will continue to rise. With space in the right place, users are happy to overlook feature limitations, the report said.

“The combination of these trends has reduced user price sensitivity to well-located buildings and buildings incorporating the latest building design features, resulting in higher rents.”

Retail property conversions are likely to be useless

Prologis does not expect to convert closed commercial facilities into logistics facilities to solve supply problems.

According to the report, commercial facilities are usually transformed into economically feasible uses such as apartments, with more uses. Zoning issues and community opposition also present a hurdle, along with the fact that most retail spaces are difficult to reconfigure to accommodate high throughput and associated truck traffic.

Prologis Research predicts that over the next decade, 50 to 100 million square feet of space will be converted from retail to logistics. This is less than 3% of the logistics space added in a normal year.

Replacement costs will increase due to several factors

Rising land, material and labor costs have kept facility replacement costs ahead of inflation over the last decade. Land price spikes are most common in coastal markets and densely populated areas.

Material and labor cost inflation has been more pronounced since the outbreak of the pandemic and is now related to supply. The production of many construction-related materials and products has been knocked out offline during the pandemic, and producers are still catching up. In addition, payment of stimulus and increased unemployment benefits are creating labor difficulties in many industries, including construction and warehousing.

Prologis Research estimates that replacement costs have increased by nearly 60% over the last five years and by 2021 so far by 15%.

Chart: Prologis

The report pointed out other reasons why the logistics labor market is tight.

The rise of electronic fulfillment operations, which require three times as many people as traditional warehouses and have four times the turnover rate, remains a headwind. Also, as many facilities require more engineer-level positions, the need for skilled workers is increasing with the rise of warehouse automation and technology.

More facilities come online outside densely populated metropolitan areas and have smaller, sometimes less-skilled workforce pools. In addition, clustering logistics facilities will further reduce the labor supply.

The report said that more worker-friendly facilities are key.

“A healthy and sustainable work environment can give employers the benefit of attracting and retaining talent. A facility focused on worker well-being, accelerated by pandemics, such as WELL standards. Improvements are becoming more common. This certification summarizes stringent requirements in areas such as indoor air quality, water quality, natural light, thermal comfort, nutrition, physical activity facilities, and mental health. “

In addition, improving the technical capabilities of the new facility can alleviate supply challenges.

“Most of the latest equipment meets the requirements for flexible automation, but you can add certain features to make automation even easier. Increased power capacity, to recharge mobile technology. Additional space, fast data access, floor quality, strong roofs, and increased height allow you to collectively address the technologies used to increase labor needs, increase operational visibility, and manage risk. I will. “

However, the report concluded that structural changes in real estate development “are likely to continue to limit the amount of new supply offered to meet the needs of users’ future supply chains.”

“The rapid evolution of consumer habits, labor needs and technology is improving like never before, and the benefits of having the right property to accommodate future supply chains are increasing, while rarity , The occupancy rate and rent of a wide range of logistics properties are increasing. “

Prologis Ventures is an investor in Freight Waves.

Click here to see more Freight Waves articles by Todd Maiden.

Prologis sees further tightening of logistics real estate supply Prologis sees further tightening of logistics real estate supply

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