Industrial Leasing Market Update
In this week's newsletter we read the tea leaves from Prologis and Rexford earnings calls, run through reasons why supply chain modeling might be helpful for your team, and provide interviews with industrial leaders who are our partners when helping clients.
Prologis & Rexford Q3 2024 Earnings Call Takeaways
1. Demand Trends and Tenant Behavior * Prologis: Maintains high occupancy at 96.2% and a favorable lease mark-to-market advantage, even as tenants take longer to make decisions due to economic uncertainty. This trend of measured decision-making is anticipated to continue into 2025. * Rexford: Also reported robust leasing activity with 97.6% occupancy, driven by steady demand within Southern California’s infill markets. Tenant activity was strong, although decision timelines have lengthened, largely due to macroeconomic factors like inflation and geopolitical uncertainties.
2. Rent and Leasing Metrics * Prologis: Achieved substantial lease mark-to-market gains, with net effective rent changes up 68%. Though market rents softened in some regions (e.g., Southern California), high-quality assets and strategic leasing approaches helped maintain strong rent growth across many other markets. * Rexford: Reported leasing spreads at 39% net effective and 27% on a cash basis, in line with their guidance, despite some year-over-year declines in market rents (down approximately 7.5%). Their smaller spaces under 50,000 square feet experienced more stability than larger spaces, aligning with Prologis’s trend of stronger demand for Class A, smaller, and well-positioned spaces.
3. Market Segment Variability * Prologis: In markets like Houston, Atlanta, and Northern Europe, rents remained stable or increased, while Southern California faced rent declines due to high vacancies and excess capacity. However, regulatory factors (e.g., AB 98) are likely to constrain future supply and may support long-term rent increases. * Rexford: Strong performance across Southern California's smaller infill spaces, with leasing spreads expected to remain stable. Notably, subletting trends are stabilizing, signaling potential resilience in key Southern California markets despite broader supply challenges.
4. Strategic Leasing Opportunities * Short-Term Renewals and Flexibility: Both Prologis and Rexford are leveraging shorter lease terms for specific properties, providing tenants with flexibility amidst market uncertainty while maintaining the potential for favorable future rent adjustments. * Asset Quality Focus: Tenants are increasingly drawn to high-quality, Class A spaces for efficiency gains and resilience. This trend positions both Prologis and Rexford to serve high-demand clients looking to reduce costs by consolidating into prime locations.
5. Development and Redevelopment Pipelines * Prologis: Focused on sustainable developments, including a significant increase in solar capacity, with a goal of reaching 1 gigawatt by 2025. Prologis also has substantial land reserves to quickly address market demand. * Rexford: Active redevelopment of assets in prime infill areas with attractive unlevered yields, positioning for long-term value creation. Their redeveloped properties are seeing high stabilization rates, particularly in regions like the Inland Empire.
6. Strategic Outlook * Prologis and Rexford anticipate rent stabilization by mid-2025, driven by constrained supply, improved absorption, and increased tenant demand. Tenants looking for long-term leases may benefit from locking in rates now as vacancies peak and rents are more competitive. * Supply Chain and Sustainability Initiatives: Both companies are actively investing in clean energy and operational efficiencies. Tenants seeking sustainable options may benefit from these initiatives, which are geared to meet demand for reduced operational costs and higher energy efficiency.
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. Between Supply Chain Guru X and Excel, you we can 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.
New Podcast & YouTube Episodes: Interviews with Industry Leaders
We’ve recorded three new podcast episodes that dive into key market trends and strategies for success: 1. Ralph Asher of Data Driven Supply Chain, Part 2 – We discuss the intricacies of supply chain modeling with one of the top supply chain network design and optimization consultants. + Podcast Episode link + YouTube Video link 2. Justin Rappel of Pacific Industrial – We explore ground up development throughout the West Coast and what it takes to find, build, and lease Class A industrial Southern California. + Podcast Episode link + YouTube Video link 3. David Hickey of Hickey & Associates – We talk about how to best set your company up for success when finding and negotiating economic incentives across the country. + Podcast Episode link + YouTube Video link
Call to Action
We are seeing increasing levels of activity as people refine their 2025 budgets and try to get their 2024 projects across the finish line. 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) ____________________________________
Corporate ID 0104791 | License ID 01504494 9838 Research Dr. Irvine, CA 92618
Book s | Podcast | LinkedIn | Team Website | Resume | Corporate Solutions Practice
Charts & visuals
