In this week's newsletter we read through more Prologis research for macro economic trends, go through the Southern California marketplaces statistics, and provide interviews with industry leaders.
Post Election Shift
Here are the global trade production and trade patters to watch and how they might be reshaped by tariffs: 1. Consumption will remain the primary source of logistics real estate growth. Evolving trade flows will naturally factor into the demand landscape in global gateway markets. However, most logistics real estate is located close to end consumers, with growth driven by the rise of e-commerce, supply chain modernization, and consumption patterns. 2. Imports must grow as consumption expands. Imports into the U.S. have grown by 23% since 2019.i Offshore production must grow under a range of tariff scenarios, as many products remain prohibitively expensive to manufacture onshore. 3. Trade links with Asia will remain important, preserving existing trade routes. China still anchors global manufacturing, but companies are diversifying into other Asian nations. This group has increased imports to the U.S. by 45%ii since 2019. 4. Supply chain regionalization will continue, exemplified by the rise of Mexico’s production capabilities. Imports from Mexico grew 39%ii since 2019 and logistics real estate demand remains well above pre-pandemic levels. We expect further structural growth driven by near-shoring after a period of short-term uncertainty as the new U.S. administration renegotiates trade agreements. 5. Onshoring and nearshoring will complement imports. Recent U.S. manufacturing investments are concentrated in green industries, semiconductors and healthcare—industries that have high value, but limited implication for containerized shipping. Consequently, we expect that onshoring will be a source of net growth for U.S. logistics real estate demand.
There are fascinating graphs and deep analysis on the report. Download the PDF here and share with your colleagues.
Bold Predications for 2025
Here are the global trade production and trade patters to watch and how they might be reshaped by tariffs: 1. Bulk space will rebalance first: Vacancy rates will fall the fastest for the largest buildings in U.S. and Europe. A combination of increasing demand and limited new supply will push vacancy rates down by 100 bps or more for buildings 500,000 square feet or larger. 2. Freight will fly: Air cargo volume will surge by double digits, fueled by growing international e-commerce beyond China and the U.S. 3. South America’s turn to take the stage: Brazil’s logistics real estate rent growth will surpass the global average by more than 500 bps as vacancy rates fall to never-before-seen mid-single digits.i 4. All quiet on the construction front: Groundbreakings of logistics real estate buildings will decrease further in 2025, remaining 15% below normal globally. 5. California’s domino effect: New legislation will seek to limit new supply in key locations. Following the passage of State Bill AB98 in California, we expect other states to propose similar measures in 2025. 6. Better together: Freight industry consolidation will accelerate. M&A activity will intensify and drive technology investment and the next wave of expansion. 7. What global trade slowdown? U.S. imports will grow faster than GDP despite new tariffs and the East Coast will take a larger share post-International Longshoreman Association (ILA) contract ratification.
This is another must read report that is so rich in analysis. Download the PDF and share with your colleagues.
Southern California Industrial Market Snapshot
Orange County: * Vacancy Rates: The vacancy rate increased to 3.6% in Q3 2024, marking the seventh consecutive quarterly rise and a 150 basis points (bps) year-over-year (YOY) increase. * Leasing Activity: Leasing activity reached 2.4 million square feet (SF), the highest in two years, with net absorption returning to positive territory at 141,772 SF after four of the last five quarters showed negative absorption. * Asking Lease Rates: The average asking lease rate decreased by $0.05 to $1.61 per square foot, contributing to a 6.94% YOY rent decrease.
Los Angeles County: * Vacancy Rates: The overall vacancy rate rose to 4.8% in Q3 2024, a 50 bps quarter-over-quarter (QOQ) and 250 bps YOY increase, reaching the highest rate in the last decade. * Net Absorption: The market experienced negative net absorption of 2.8 million SF, indicating a decline in occupied industrial space. * Asking Lease Rates: The average direct asking rate stood at $1.49 per SF on a monthly, triple-net basis.
Inland Empire (Riverside and San Bernardino Counties): * Vacancy Rates: The overall vacancy rate increased to 7.9% in Q3 2024, a 90 bps QOQ and 410 bps YOY rise. * Net Absorption: Negative quarterly net absorption was driven largely by spaces over 500,000 SF becoming vacant as sizable tenants shed space or consolidated. That said YTD net absorption is still roughly 9,600,000 SF. * Asking Lease Rates: Taking lease rates fell by 6.3% to $1.19 per SF per month, with the Inland Empire East at $1.14 and the West at $1.22 per SF per month.
Supply Chain Modeling
We're increasingly helping companies model their supply chains in order to integrating their real estate, inventory, transportation and labor strategies into their overarching business plans. We can now model your current supply chain and then run scenarios for different outcomes to assess the cost and savings with each scenario. Common scenarios you might be facing that are worth discussing: * Consolidating distribution centers, warehouses and manufacturing plants. * M&A and modeling post acquisition/disposition supply chains. * Figuring out the real estate implications of pooling, aggregating, consolidating and backhauling shipments. * Installing warehouse automation and increasing inventory density. * Expansion into new geographic territories and the implications of service levels to customers.
Reach out to us if you have a business scenario you are contemplating that could benefit by modeling.
Interviews with Industry Leaders
We’ve recorded three new podcast episodes that dive into key market trends and strategies for success: 1. Understanding Warehouse Picking and Optimization – Rob Jensen PhD and co-founder of miiplan explores how you can optimize the path of products within the warehouse four walls. + Podcast Episode link + YouTube Video link 2. Painting Industrial Property – Neal Perry of Industry Coatings explains what its like painting 1,000,000 SF warehouses and how to add value to property through cosmetic upgrades. + Podcast Episode link + YouTube Video link 3. Electrifying Industrial Property – John Gaglio of Newport Utility Consultants give us the 101 and 201 of how to upgrade electrical service in new construction and second generation industrial properties and the value of parenting with Edison. + Podcast Episode link + YouTube Video link
Call to Action
We are seeing increasing levels of urgency as companies try to refine their business plans based on the new administration and get back to growth. Reach out to Grant, Chris, or me to discuss how we can start adding value for you today.
Best Regards,
Justin Smith, SIOR MBA, MRED, MCR, MSCM Candidate Senior Vice President | Principal Lee & Associates | Irvine
D 949.790.3151 C 949.400.4786 O 949.727.1200 jbsmith@lee-associates.com (mailto:jbsmith@lee-associates.com) ____________________________________
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