

Prologis’ leading indicator of logistics real estate demand showed significant volatility in the second quarter. The April report came amidst the early stages of COVID-19 shutdowns with a reading below the prior low of the Global Financial Crisis. An index reading below 50 signals a contraction in demand compared to the month prior. In our view, the index readings in May and June of up to 50.1 suggest relative stability in business activity, while July’s reading of 57.9 indicates moderate growth in activity. Space utilization, another leading indicator of logistics demand, fell to 83% in April (its lowest level since 2012) before climbing to 84.3% in July—still below the pre-pandemic average.
Logistics operations are gradually getting back to normal. Anticipating an impact based on extraordinary measures to prevent the spread of the virus, we added a question to assess the impact of coronavirus on operations beginning in March. By July, less than 3% of respondents reported that they had suspended operations as a result of the pandemic (about half of peak shutdown levels), with more than 60% reporting operational changes such as staggered work shifts. More than 34% responded that operations were “business as usual.”
A wider range of customer industries and size categories underscored growth in the second quarter. Relative to overall consumption, the logistics real estate customer base skews toward basic daily needs and structural trends such as e-commerce.3 These essential goods and operations continued to function – and in some cases thrive – even during the height of the Stay-at-Home phase of the pandemic. In Q2, leasing activity evolved alongside re-openings to incorporate a broader group of participants, which is reflected in diversity by industry and size category. Elevated short-term leasing activity restored supply-demand balance to several big box submarkets in recent months as larger spaces were taken down. In addition, customers may have a window in which to act opportunistically in supply-constrained infill submarkets, given an environment of rising sublease space, a high proportion of small- to medium-sized customers, and heightened uncertainty that paused activity, especially along the West Coast. In aggregate, net absorption came in above expectations with 37 MSF for the quarter, leading to an upward revision to our 2020 demand forecast to 160 MSF.
Speculative development activity fell but a handful of markets remain active. Speculative development starts fell by 30% (y/y) in the second quarter. Capital appetite for the asset class remains high and continues to gravitate toward build-to-core strategies in lower-barrier markets. Speculative development in Houston, Dallas and Pennsylvania remained active. Build-to-suit (BTS) activity also accelerated, with e-commerce driving growth for large box space. Higher-than-expected BTS activity coupled with stubbornly high speculative starts by merchant developers in a handful of markets drove our 2020 supply forecast to 250 MSF.
Logistics real estate customer activity fluctuated alongside COVID-19 uncertainty. Customer leasing activity improved substantially in the second half of the quarter, as by then customers had more clarity and time to digest how the pandemic might affect their business. Demand and supply cycles shifted quickly, with bulk distribution outperforming smaller infill locations (a reversal of recent trends). Market rental growth contracted by ~1.5% (q/q), which equates to approximately one additional month of free rent on a five-year lease. Still-low vacancies in most markets, together with structural trends that could drive a brisk recovery, mean the window for customers to act on favorable conditions could be short even as uncertainty remains high.
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This report is based, in part, on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. No representation is given with respect to the accuracy or completeness of the information herein. Opinions expressed are our current opinions as of the date appearing on this report only. Prologis disclaims any and all liability relating to this report, including, without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, this report.
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Prologis’ Research department studies fundamental and investment trends and Prologis’ customers’ needs to assist in identifying opportunities and avoiding risk across four continents. The team contributes to investment decisions and long-term strategic initiatives, in addition to publishing white papers and other research reports. Prologis publishes research on the market dynamics impacting Prologis’ customers’ businesses, including global supply chain issues and developments in the logistics and real estate industries. Prologis’ dedicated research team works collaboratively with all company departments to help guide Prologis’ market entry, expansion, acquisition and development strategies.
Prologis, Inc. is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. As of June 30, 2020, the company owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 963 million square feet (89 million square meters) in 19 countries.
Prologis leases modern distribution facilities to a diverse base of approximately 5,500 customers across two major categories: business-to-business and retail/online fulfillment.
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