Warehouse rents will eventually hit a ceiling, but that’s not being seen in the roughly 1 billion square feet of logistics real estate comprising Prologis’ portfolio.
The real estate development company, which owns 4,675 buildings across 19 countries, has a rosy outlook on the warehouse market as it increased its rent growth forecast for the year to 22 percent, up from the previous guidance of an 11 percent rise.
The revised forecast was attributed to the pace of rent growth, which exceeded the company’s expectations in the first quarter.
“Property fundamentals are stronger than expected,” Chris Caton, managing director of global strategy and analytics, told analysts of the thinking behind the revised forecast.
Caton went on to point out the U.S. is outperforming other markets the company has property in and that is being driven by coastal areas such as New Jersey, Pennsylvania, Baltimore, south Florida and Southern and Northern California.
Rent in coastal markets for Prologis properties is expected to increase roughly 25 percent this year. That compares with about 15 percent for inland properties.
It’s a landlord’s market with demand for warehouse and fulfillment centers catering to companies’ e-commerce logistics and faster delivery needs.
Asking rents for industrial nationally rose 11.3 percent last year from the prior year to $7.11 per square foot, according to JLL. Meanwhile vacancy stood at 3.8 percent, the first time the rate dipped below 4 percent.
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The question of just how high industrial rents can go came up during Prologis’ quarterly earnings call this week.
“Yes, there is a limit to how far industrial rents will grow,” Prologis co-founder and CEO Hamid Moghadam told analysts. “There’s a limit as to how far the prices of anything can grow, but if you look at the factors that are contributing to this tremendous growth in industrial rents, there are many, including supply and demand to start with, which you’re dealing with a market that’s 3.5 percent vacant.”
Moghadam confirmed available supply of industrial buildings is low in the markets where the company does business. However, other markets, the CEO said, have “already hit that threshold of rent increase and rent increase is flat…. I can’t think of any of those in our portfolio, but I’m sure there are markets like that.”
The executive went on to point to the confluence of factors continuing to support rising rents. That includes increasing construction and land costs, pushback on new industrial development in some parts of the country and the broader rise in costs across the supply chain.
The CEO went on to say the market is in “unprecedented territory.”
“While some people actually used to say industrial rents are never going to go up—but industrial rents do go up… but they’ve never grown at these levels,” Moghadam said. “We’ve never had market conditions like we have now. We’ve never had e-commerce at this level of importance. We never had resilience becoming such a big factor. We haven’t had these bottlenecks in the supply chain that clog up the network. And we haven’t had inflation and shortage of materials and labor and all that in terms of bringing on additional [warehouse] supply.”
Pushback in some communities against construction of warehouses and other types of industrial uses has become a point of contention amid the general shortage of space. A number of cities in Southern California’s Inland Empire region have implemented temporary moratoriums on development. The San Francisco Board of Supervisors in February introduced proposed legislation that would apply stricter zoning requirements on parcel delivery facilities, or buildings used for last-mile fulfillment. California Assembly member Eloise Gomez Reyes (D-Colton), also in February, introduced legislation that would create buffer zones of at least 1,000 feet between industrial projects of 100,000 square feet or more and schools, homes and other places.
Prologis chief financial officer Tim Arndt called the pushback in getting projects entitled, or approved, in some communities a headwind, but said it hasn’t yet impacted the company’s forecast on new construction.
Prologis in the first quarter started construction on 32 projects totaling more than $1 billion. Arndt went on to say the company is exercising some restraint in its construction forecasts as it monitors the global supply chain and Ukraine.
“If I were betting right now, I think we will increase that guidance as we go throughout the year,” Arndt told analysts. “But, at this point in time, with what’s going on in the world, we just think it’s prudent. But [the unchanged forecast] is not related specifically to entitlements now, but that is, for sure, a headwind in the future.”