Copyright 2006, Traffic World, Inc.
Demand for distribution space around the world is likely to stay robust throughout the year, commercial real estate watchers say, although interest rates have tipped in favor of leasing and away from buyers.
Continuing strong demand for distribution space propelled 2005 net earnings at commercial real estate developer ProLogis to $370.7 million, up more than 80 percent from 2004''s $202.8 million report.
With 377.2 million square feet of space in 2,340 facilities worldwide - more than most of its competitors combined - ProLogis is something of a bellwether of the warehouse and distribution sector. By that measure, it''s a thriving business.
"Our strong financial performance in 2005 reflects the significant improvement in global demand for distribution space," said CEO Jeffrey H. Schwartz.
"This customer-driven demand supported further increases in overall occupancies, record leasing activity and positive net absorption across virtually all of the markets in which ProLogis operates worldwide."
Industry experts say the demand for warehouse and distribution space has remained hot across the entire industry, from the sprawling facilities of ProLogis to tighter multi-tenant sites aimed at more flexible operations.
Scott K. Perkins, director at NAI Logistics Group, said, "We too have seen (leasing) demand increase, and not just in ProLogis-type space, but in smaller ones under 100,000 square feet. There have been a number of deals we''ve done in the last six months where in the six months prior there were no deals at all."
But Perkins said, the type of demand shifted last year in response to interest rate hikes.
Perkins said in 2005 his firm, which provides real estate and services to warehouse and distribution companies, saw buyers crowd the market as the Fed signaled its intention to continue raising borrowing rates. Today, he said, buyer demand appears to have peaked, while leasing demand has risen.
The result is a new tug-of-war between lessees and landlords over leasing terms, Perkins said. 3PLs want leases that line up with the terms of their agreements with shipping clients - typically around three years. Landlords prefer five- and 10-year contracts that offer more lengthy and favorable amortization of the property.
Leasing of ProLogis''s stabilized properties reached 94.5 percent - the highest since second quarter 2001 - from 92.3 percent at year-end 2004.
Overall occupancies in the top 30 North American logistics markets tracked by ProLogis rose 1.22 percent for the year.
"Importantly, this improvement occurred during a time when approximately 100 million square feet of new distribution space was added to the overall supply in these key markets," said Schwartz. "This positive absorption of space has led to firming of rental rates overall and rate increases in a greater number of North American markets."
Perkins said demand is increasing in Southern California and Northern New Jersey for distribution space farther away from, but still within driving distance to, major seaports. "A lot of what comes out of the port goes straight to the customer," he said, "not necessarily to the distribution center."
Overseas, ProLogis reported record leasing activity for the year in the United Kingdom, Poland and Germany, and strong leasing of multi-customer inventory developments in Japan. Properties completed in China in 2005 are 70 percent leased, the company said.
Assets owned and under management in ProLogis property funds grew to nearly $10 billion in 2005, up 19.6 percent.
ProLogis formed Japan Properties Fund II, with total capacity of about $3 billion, and recently announced formation of a new North American Industrial Fund with roughly $4 billion in total capacity.
"This open-end, infinite life fund is our largest-ever private capital raise and demonstrates the continued institutional appetite for class-A industrial real estate," Schwartz said.