The latest Industrial Business Indicator (IBI) from global logistics real estate leader Prologis reveals a market undergoing significant transformation, with developers showing increased caution while demand fundamentals remain resilient.
Market Barometer Shows Steady Growth
The July IBI reading of 60.6 continues to indicate expansion (scores above 50 signal growth), maintaining the index's position within what Prologis considers the healthy consumption activity range of 56-62. However, beneath this surface stability, the report uncovers important sector dynamics that could shape future market conditions.
Development Slowdown Raises Future Supply Concerns
Most notably, speculative construction starts plummeted 28% compared to Q2 2023 levels. Prologis analysts warn this development pullback may precipitate warehouse space shortages in 2025-2026. Multiple factors contribute to developers' newfound restraint:
- Elevated construction costs continue to pressure margins
- Rising interest rates have increased capital costs
- Lengthening approval timelines create uncertainty
Utilization Rates Show Operational Efficiency Focus
The IBI utilization metric rose to 84.9%, matching Q2 averages but still below the 85.5%-85.6% typical during expansion periods. This suggests companies are maximizing existing space before committing to expansion, reflecting cautious operational strategies in the current economic climate.
Leasing Activity Defies Broader Caution
Despite the general market restraint, leasing activity shows surprising vitality. Companies are adopting "smart growth" approaches, seeking appropriate spaces to meet evolving customer needs. Prologis projects 180-200 million square feet of leasing activity over the next 12 months, driven by:
- Consistent retail sales growth
- Inventory levels aligning with demand
- Strategic positioning for future needs
Supply Dynamics Shift Significantly
The construction pipeline shows notable contraction, with new deliveries expected to decline sharply in the second half of 2023. Current market conditions include:
- Approximately 70 million square feet of available unleased space
- Q2 speculative starts at 46 million square feet
- A 12% reduction in unleased space under construction from Q1 peaks
Vacancy Rate Projections Suggest Future Tightening
Prologis analysts anticipate vacancy rates will peak within 3-6 months before stabilizing around 6% in 2024. With net absorption expected to accelerate and completions projected to decline 42% in the second half of 2023, vacancies could begin decreasing by 2025. Rental rates may follow a similar trajectory, experiencing near-term moderation before recovering.
Expert Analysis: Cautious Optimism Prevails
Melinda McLaughlin, Prologis Senior Vice President of Research, notes that current consumption and restocking patterns should sustain U.S. warehouse activity in coming months. However, she emphasizes vigilance regarding potential consumer weakness.
"The 28% decline in speculative starts aligns with our expectations," McLaughlin explained. "Since Q4 2022, rising rates and high construction costs have significantly compressed development margins."
While utilization remains below historical expansion averages, McLaughlin reported increased leasing activity and prospect tours since early 2024. "We anticipate gradual demand improvement through 2025, assuming a soft landing scenario," she said. "Ongoing restocking efforts and strong July port volumes should help absorb excess space."
Structural Adjustment Underway
The IBI data collectively portrays an industrial real estate market in transition. Developer caution contrasts with resilient underlying demand, creating a complex environment where strategic positioning becomes increasingly important. Market participants must balance near-term prudence with preparation for potential future tightness.