Having a more conservative inventory strategy is expected to be a big driver of industrial demand amid ongoing shipping disruptions, according to Prologis.
A key trend that has been reversed in the industrial sector was shipping volume shifting back to the West Coast as a result of “the escalating issues in both the Suez and Panama canals together with the resolution of the West Coast labor negotiations,” Tim Arndt, chief financial officer at Prologis, noted in its full-year 2023 earnings call.
The International Longshore and Warehouse Union signed a labor agreement in August 2023 after 13 months of negotiations. The six-year contract ended worries over West Coast port disruptions by promising improved pay and benefits for dockworkers at 29 ports in the area.
In November 2023, West Coast port activities were up by 24 percent year-on-year, and inbound shipments were up even more, according to Arndt. He expected this to translate into higher leasing activity down the road.
Shipping traffic at both the Panama Canal and the Suez Canal have been disrupted in recent weeks, the former by drought and the latter by the Houthi attacks in the Red Sea.
While Prologis is watching the East Coast more closely at the moment, it is too early to see what medium-term leasing decisions will look like in response to the issues in the Panama Canal, the Red Sea and the Suez Canal, according to Chris Caton, managing director, global strategy and analytics.
“But number one is the clarification or the ratification of the labor agreement on the West Coast is providing a clear landscape for decision-making, and engines of growth are beginning to kick in in Southern California,” Caton added.
“The world is going to go back to a stable, predictable, just-in-time type of inventory strategy”
Dan Letter
Prologis
Meanwhile, Arndt recognized that global demand for inventory and warehouse space will be higher over the next few quarters due to shipping disruptions. This is because there is a high volume of near-term deliveries that need to be absorbed into the markets, he said.
President Dan Letter pointed to “marginally better” tenant sentiment in the last 30 days, fueled by healthy proposal volumes. “Customer dialogs have been strong. Forty-five percent of our available space is in discussion right now with active proposals.”
With Covid-related disruption now over, “the world is going to go back to a stable, predictable, just-in-time type of inventory strategy,” said Letter. “I think each of these things, whether it’s Panama, whether it’s Suez, whether it’s in the Middle East, whether it’s something in the Persian Gulf, will remind people that they generally need to have a more conservative inventory strategy. And that’s the big long-term driver that is going to be a tailwind for demand that we haven’t really seen play out just yet.”
Aside from its logistics business, Prologis is also looking to invest up to $7 billion to $8 billion in data centers over the next five years. The firm started with more than $500 million’s worth of data center investments in the last quarter of 2023.
Despite actively growing its data center business, Letter thought the firm would need to be “prudent” to be careful about how it would project its data center volume.
“Keep in mind, our data centers business is a part of our longer, higher, and better use business we’re going to build. We’re going to merchant build these, and we’re going to recycle that capital into the business we love so much, which is logistics,” Letter explained.
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