Key Takeaways
- • Prologis projects that logistics real estate cycles will be less volatile, with each dollar of U.S. GDP requiring at least 20% more logistics space than before the COVID-19 pandemic.
- • E-commerce is on pace to exceed 23% of U.S. retail goods sold in 2023, up 100 bps year-over-year, and the top consumer goods companies increased product mix by 16% from 2018 to 1H 2023.
- • U.S. and Europe new building deliveries are expected to contract by 35% or more in 2024, creating a window for vacancies to fall below historical norms in late 2024 and into 2025.
- • Replacement costs remain elevated, with required development returns up more than 200 bps due to financial market volatility and tighter lending standards.
Summary
Prologis outlines four forces it expects to shape the logistics real estate cycle, arguing that future cycles will be less volatile than prior ones. The company estimates that each unit of U.S. economic growth will require more than 20% additional logistics space compared with pre-pandemic levels. Drivers include higher inventory carry of 5% or more to build supply chain resilience, greater product variety requiring more storage, goods' share of U.S. consumption remaining elevated at approximately 38% (versus 36% pre-pandemic and a 40% pandemic high), and rising online share of goods spending, which Prologis expects to grow from 15% in 2019 to 25% by 2025. The company notes e-commerce requires three times the logistics space of brick-and-mortar retail.
Supply discipline is a second pillar of the company's outlook. Prologis states that private owners and owner-users have been net sellers of logistics real estate over the past decade while domestic and foreign institutions have increased allocations. Barriers to supply are also rising: developed land within 20 miles of major U.S. city centers increased 32% over the past 20 years, and regulatory hurdles are lengthening construction timelines and raising costs.
On demand, Prologis expects e-commerce share of U.S. goods sales to grow more than 100 bps in 2023, equal to more than 50 million square feet of demand, and expects demand to concentrate near consumption centers as delivery timelines shorten. The company cites a shift from just-in-time to just-in-case inventory management, with logistics demand from 2020 through 1H 2023 totaling 1.2 billion square feet, or 330 million square feet per year, versus a historical expansionary average of 175 to 200 million square feet in the top 30 U.S. markets. Prologis also points to diversified sourcing and nearshoring, including demand near Laredo and Dallas in Texas and expanded footprints near East and South Coast seaports.
Finally, Prologis projects new U.S. and European building deliveries to fall by 35% or more in 2024, citing elevated replacement costs, higher financing costs, and a more than 200 bps rise in required development returns. Combined with positive demand, the company expects U.S. vacancy to fall from the mid-4% range at the start of 2024 to the mid-3% range by year-end, with a similar pattern in Europe, supporting rental growth in 2025 and beyond. Economic uncertainty could, however, shift some demand into 2024.
Supply discipline is a second pillar of the company's outlook. Prologis states that private owners and owner-users have been net sellers of logistics real estate over the past decade while domestic and foreign institutions have increased allocations. Barriers to supply are also rising: developed land within 20 miles of major U.S. city centers increased 32% over the past 20 years, and regulatory hurdles are lengthening construction timelines and raising costs.
On demand, Prologis expects e-commerce share of U.S. goods sales to grow more than 100 bps in 2023, equal to more than 50 million square feet of demand, and expects demand to concentrate near consumption centers as delivery timelines shorten. The company cites a shift from just-in-time to just-in-case inventory management, with logistics demand from 2020 through 1H 2023 totaling 1.2 billion square feet, or 330 million square feet per year, versus a historical expansionary average of 175 to 200 million square feet in the top 30 U.S. markets. Prologis also points to diversified sourcing and nearshoring, including demand near Laredo and Dallas in Texas and expanded footprints near East and South Coast seaports.
Finally, Prologis projects new U.S. and European building deliveries to fall by 35% or more in 2024, citing elevated replacement costs, higher financing costs, and a more than 200 bps rise in required development returns. Combined with positive demand, the company expects U.S. vacancy to fall from the mid-4% range at the start of 2024 to the mid-3% range by year-end, with a similar pattern in Europe, supporting rental growth in 2025 and beyond. Economic uncertainty could, however, shift some demand into 2024.
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