Logistics Pricing Power will Strengthen in 2021, thanks to the rising Supply-Demand Imbalance

Growth will be the watchword for most logistics markets in 2021 fueled by trends in supply and demand fundamentals. 

A recent ProLogis report predicts strong rent growth across both the US and global logistics markets this year, thanks to a “wall of capital” that flocked to the sector amid the global pandemic. There are risks, of course: the pandemic still isn’t over, and geopolitical headwinds continue to shift. The logistics sector has been a resilient, relatively safe harbor for investment over the past year, leading to potential areas of oversupply—but ProLogis predicts structural demand hurdles and increasing replacement costs will mean new supply isn’t likely to meet demand in most areas, at least not this year.

The firm also predicts pricing power will strengthen in 2021, thanks to that rising supply-demand imbalance. There’s increased competition for a limited number of developable parcels across many US markets that’s only expected to intensify, particularly in infill areas. Demand will be particularly strong in urban fulfillment locations near end consumers, thanks to the acceleration of trends like e-commerce and inventory building.

“Structural trends are expected to drive demand for prime logistics real estate,” the report states. “The future of supply chains is larger, faster, more resilient and closer to end consumers. Modern space is also needed to incorporate technological advancements that improve efficiency and solve customer pain points.”

While COVID-19 will continue to throw a wrench into many logistics customers’ operations, this year will likely be less volatile than last. Cyclical demand is predicted to increase in the second half of the year as vaccination programs roll out across the US and the world and economies reopen.

Rent growth decelerated to 3.2% in 2020 from 8% a year prior, thanks to factors that were both expected (like new supply) and unexpected (like the pandemic). Demand for logistics real estate was positive, causing rental rates to appreciate throughout the year even as 300 million square feet of new space came to market. Rent growth leaders in the US included New Jersey/New York City, the Inland Empire, Pennsylvania, Dallas and Atlanta as well as multi-market distribution hubs like Baltimore, California’s Central Valley, Reno, Nashville and Louisville.

The sector has emerged as an investor favorite this year, as private equity and institutional investors continue to sock money into industrial assets. ElmTree Funds recently announced a partnership with Guggenheim Investments to invest in real estate assets tied to last-mile delivery, e-commerce, and logistics, and late last year Logistics Property Co. closed its LPC Logistics Venture One industrial-to-core fund with $1 billion in capital commitments to focus on developing ground-up industrial properties across the US.  And last week, industrial investment and development firm CapRock Partners closed its latest industrial fund at a hard cap of $250 million, with a focus on acquiring middle-market, value-add industrial properties across primary markets California, Nevada, and Arizona and in secondary markets across Utah and the Pacific Northwest.