Real estate investment trust Prologis said it expects warehouse rental rates to increase 5% in the United States and 4% around the globe this year during its 2020 fourth quarter earnings call. The projection comes partly from the company’s data, which revealed it signed a record 65 million square feet in lease space globally during the fourth quarter of 2020. New leasing increased 22% on a size-adjusted basis.
“(A) broad range of customers signed new leases in the fourth quarter led by consumer products, food and beverage, electronics and health care segments,” Prologis Chief Financial Officer Thomas Olinger said during the call. “E-commerce activity accounted for 19.8% of new leasing.”
The fact that e-commerce comprised almost 20% of Prologis’ new leasing last quarter isn’t surprising, given the way people have shopped during the COVID-19 pandemic. Shoppers had been gravitating toward online shopping even before the Coronavirus hit the U.S. More people began to shop from home however as physical stores closed their doors, and despite stores starting to reopen, there is still a segment of the population who will feel more comfortable shopping online.
The Growing Importance of E-commerce
As e-commerce grows, so will the need for storage space for the items people are virtually shopping for. The demand for warehouse space will give property owners leverage to raise their rents if they choose. Additionally, warehouses don’t just give retailers a place to hold their goods—they also allow them to ship items and get them to their customers’ doorsteps in a timely manner.
“The need for speed and flexibility is also reflected in elevated short-term leasing, which was up 58% in the third quarter as 3PL, retail and transportation customers raised to secure space ahead of the holidays,” Olinger said. “Lease proposals remain at healthy levels.”
Meanwhile, Olinger noted Prologis saw its fourth quarter net absorption in the U.S. reach new heights at 100 million square feet along with a new supply of 90 million square feet. Rents in the company’s markets increased by 3.2%; all of that growth occurred during the second half of last year. The surge is why Prologis is forecasting rents will grow by approximately 5% in 2021.
The company also expects overall fundamental improvement in 2021 and beyond based on a few factors, including an accelerated “retail revolution” due to the COVID-19 pandemic. The e-commerce penetration rate went up 480 basis points to 20% of goods sold in the U.S. last year. E-commerce holiday sales went up by at least 30%, according to Olinger. Online sales could slow at some point this year now that the holiday rush is over, but another spike is expected, keeping warehouse demand intact.
A Potential Slowdown Would be no Surprise
“While we expect the share of goods purchased online to grow further, a pause later this year would not surprise us, as consumers expand spending on services and experiences over goods,” Olinger said. “Our customers continue to plan for a long-term, retooling supply chains for increases, they should generate a cumulative incremental demand of 200 million square feet or more over the next several years. Third we expect higher inventory levels. Inventory to sales ratios remain near all-time lows. We believe that’s had an impact on our customer space utilization as it ticked down to 83% in the fourth quarter.”
Joe Dyton can be reached at email@example.com.