If trade tariff uncertainties briefly stimulated leasing activity in the second quarter, the third quarter marked a pivotal inflection point for logistics property demand. According to the Industrial Business Indicator (IBI) recently released by San Francisco-based REIT Prologis, multiple key metrics collectively drove this shift.
The IBI index measures market sentiment by surveying customers about warehouse activity. The Q3 IBI Activity Index reached 53, with this turning point primarily reflected in net absorption, new lease signings, and project proposals all exceeding 2024 averages. The report noted that while trade volatility pushed supply chain activity to peak in early 2025, the IBI subsequently declined, emphasizing that recovery isn't linear. Growth is currently led by large corporations and e-commerce companies, with other industries expected to follow.
Prologis IBI Index: Definition and Components
The Prologis Industrial Business Indicator (IBI) serves as a vital tool for assessing logistics real estate market health. Through regular surveys of Prologis customers' activities and expectations, it reflects warehouse space demand and utilization. The IBI comprises several key components:
- Activity Index: Measures overall customer activity levels regarding warehouse space, including leasing, expansion, and operational efficiency.
- Net Absorption: The difference between newly leased and vacated space during a specific period, indicating actual market demand.
- New Lease Signings: Quantifies the number and scale of new lease agreements, serving as a leading demand indicator.
- Project Proposals: Reflects customer interest in new construction or facility upgrades, signaling future investment trends.
- Utilization Rates: Measures how effectively customers use existing warehouse space, indicating supply chain efficiency and inventory management.
Key Drivers of Demand Growth
What factors contributed to this improvement compared to 2024 averages? Prologis Global Research Head Melinda McLaughlin identified several converging elements:
- Customer Action & Long-Term Investment: Businesses are proactively addressing trade uncertainties while focusing on long-term growth. Record leasing agreements and increased build-to-suit projects in Q3—particularly from large clients and essential industries (food/beverage, e-commerce, healthcare)—demonstrate structural supply chain investments.
- Improved Utilization: Customers are expanding usage of existing facilities, signaling operational efficiency gains that typically precede healthier business conditions.
- Favorable Market Conditions: Minor rent adjustments and reduced new supply have created advantageous leasing opportunities that customers are seizing.
Utilization Rates: A Barometer for Inventory Strategy
Prologis observed utilization rates climbing to 84% in Q3, nearing 85% by October. This suggests customers are fully deploying available capacity as inventories normalize.
Notably, businesses maintain "right-sized" inventory strategies with utilization below traditional expansion thresholds—a posture allowing rapid response to unexpected consumption spikes.
Cyclical Trend or Structural Shift?
Does this utilization surge indicate a lasting transformation? McLaughlin views it as primarily cyclical: "Current economic uncertainty and high carrying costs prompt cautious inventory management. As expansion resumes, we anticipate buffer stock rebuilding—especially given persistent supply chain disruptions."
Vacancy Rates and Future Projections
The report forecasts stable vacancy rates around 7%, with declining construction starts (below 2017-2019 averages) suggesting future tightening. "New speculative development has slowed dramatically," McLaughlin noted. "Once existing supply is absorbed—particularly for modern, well-located facilities—rent growth may accelerate given high replacement costs."
Market Influencers and Outlook
Logistics real estate demand evolves through complex interactions between:
- Macroeconomic conditions
- Trade policy fluctuations
- E-commerce expansion
- Supply chain innovations
- Geographic positioning
- Construction pipelines
- Interest rate environments
Looking ahead, the sector faces challenges (economic uncertainty, labor shortages) but significant opportunities from e-commerce growth, urbanization, technological advancements, and emerging market potential.