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Prologis sees further tightening in logistics real estate supply

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A June research report from Prologis (NYSE: PLD) points to several supply headwinds in industrial property markets that will cause new asset completions to lag behind demand over the next decade.

The research arm of the San Francisco-based logistics real estate mutual fund said land shortages, additional building needs, increased replacement costs, and approval issues are some of the reasons supply remains tight and rents will continue to rise.

Few places available in urban areas

Industrial land in densely populated areas is scarce.

Decades of renovation efforts in large metropolitan areas have resulted in areas being converted from industrial uses to offices and apartments. Warehouses have also grown in size, moving from warehouse centers to high-turnover facilities, both of which require more space.

The report found that buildings constructed after 2000 were 55% larger and took up 66% more land than those constructed in the 1980s and 1990s.

The population growth beyond the city centers as well as regulatory constraints have led to more logistics space being developed outside of metropolitan areas. As a result, the delivery distance from logistics facilities to consumers has increased over time.

Diagram: Prologis

But the need to be closer to the buyer is growing as more operators look for space on the last mile in densely populated areas to shorten delivery times. This has put pressure on the value of urban logistics space.

Without additional space in these markets, there is essentially little competition that will keep rents inflated. If space is available in the right place, users are willing to overlook functional limitations, the report says.

“Together, these trends have reduced the price sensitivity of users for buildings in good locations or with the latest building design features, which has led to higher rents.”

Retail property remodeling is unlikely to help

Prologis does not expect that converting shuttered retail properties into logistics facilities will resolve supply issues.

According to the report, retail properties tend to be converted to more economically sensible uses, such as apartments, which have higher and better usage. In addition, development issues and community opposition pose hurdles, along with the fact that most retail spaces are difficult to remodel to handle high throughput and associated trucking.

Prologis Research expects only 50 to 100 million square feet to move from retail to logistics over the next decade. That is less than 3% of the logistics space that was added in a normal year.

Replacement costs increase due to several factors

The rise in land prices, as well as material and labor costs, has kept asset replacement costs ahead of inflation over the past decade. Spikes in land values ​​were most common in coastal markets and densely populated areas.

The cost inflation of materials and labor has been more pronounced since the beginning of the pandemic and is currently supply-dependent. The production of many construction-related materials and products was taken offline during the pandemic and producers are still catching up. In addition, incentive payments and improved unemployment benefits have created labor difficulties in many industries, including construction and warehousing.

Prologis Research estimates that replacement costs have increased nearly 60% in the past five years and by 15% in 2021.

Diagram: Prologis

The report pointed to other reasons for the tension in the logistics labor market.

The increase in e-fulfillment businesses, which require three times as many staff as traditional warehousing and have a turnover rate four times as high, remains headwind. In addition, with the rise of warehouse automation and technology, the demand for skilled labor has increased as many facilities now require more engineering-level jobs.

Outside of large, densely populated metropolitan areas, more and more institutions are going online and have a smaller, sometimes less skilled workforce. In addition, the bundling of logistics facilities further reduces the labor supply.

The report says more worker-friendly facilities are key.

“A healthy and sustainable work environment can give employers an advantage in attracting and retaining talent. Accelerated by the pandemic, facility improvements that focus on worker wellbeing, such as the WELL standard, are becoming increasingly popular. This certification combines strict requirements in areas such as indoor air quality, water quality, natural light and thermal comfort as well as nutrition, exercise opportunities and mental health. “

In addition, improving the technical capabilities of new facilities can help alleviate supply problems.

“Most modern systems meet the requirements for flexible automation, but certain features can be made even more automation-friendly. Increased power capacity, additional space to recharge mobile technologies, access to high-speed data, soil quality, strong canopy and increased headroom can all accommodate technologies that are used to increase staffing requirements, increase operational visibility and control risk. “

However, the report concluded that structural changes in property development “are likely to continue to limit the amount of new supply to meet future needs of users in the supply chain”.

“The rapid development of consumer habits, labor demand and technology are better than ever and have increased the benefits of securing properties that are best suited to house the supply chains of the future, while scarcity increases occupancy and rents across the board Range of logistics properties has increased. “

Prologis Ventures is an investor in FreightWaves.

Click here to see more FreightWaves articles by Todd Maiden.

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Real Estate News

Get In On the Real Estate Market Now

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If you are a high net worth individual or are a high-income earner, you should consider real estate for these four reasons: tax benefits, passive income, long-term asset appreciation, and leverage. Real estate is currently on the forefront of everybody’s radar since the last the crash in 2008-2010. But has anyone ever explained why it is such a wealth building and income protecting investment vehicle?

No? Well, as an investor and an attorney I routinely advise clients on real estate issues and help them with their investments. In this article I will explain to you why real estate should be part of your investment portfolio and why you should get in now while the market is cooling.

REAL ESTATE AND TAXES

Real estate is one of the few asset classes with multiple tax benefits that are under appreciated by financial advisors. Why? It could be that financial advisors don’t make a commission on them or that you actually do not need a financial advisor to get into real estate. Not to diminish the role of your advisor but you do not need a financial advisor to understand these tax benefits of real estate.

  1. Real estate is valuable. Yes, you can depreciate residential real estate over 27.5 years and commercial real estate over 39 years. 26 USC Section 179 allows for the depreciation of real estate over the life of the asset class, and in the case of real estate, you can take a $500,000 residential property and depreciate it over 27.5 years. This means that you can deduct $18,181.81 each year in depreciation.
  2. Real Estate Capital Gains Can Be Deferred. Under Section 1031 of the Tax Code, if you hold a property for the requisite holding period, which is not defined in the Tax Code, you can sell that property via a like-kind-exchange using an intermediary to hold the funds while you identify a new property or properties within 45 days and close on those identified targets within 180 days. This allows you to defer capital gains taxation and forebear depreciation recapture while buying larger and, hopefully, better cash flowing real estate assets. Thus, this tax mechanism allows the investor to take their profits and leverage those into more assets thereby growing the real estate portfolio in a tax efficient manner.
  3. cost segregation. Depreciation of the real property can be accelerated by using cost segregation studies to break the assets into its various parts that fall under separate classes to allow the individual components to be depreciated over 5.7, or 15 years. This allows the property’s components to be utilized in a tax efficient manner instead of using the 27.5 or 39 year class life of the entire asset. A net result of a cost segregation study is to accelerate the depreciation to allow for more Section 179 depreciation to be taken earlier in the asset’s life.

    While more tax nuances can be discussed, these are the tax benefits that high net worth individuals should look into. Additionally, by working with a sophisticated lawyer who understands the needs of the individual and their goals, tax losses can be carried forward to future years.

REAL ESTATE AND PASSIVE INCOME

Whether using long term residential real estate, commercial storage units, short term residential real estate or apartment syndication deals, real estate allows the owner and investor to take a passive role in the management of their real estate by utilizing property managers.

The use of property managers provides the investor with the peace of mind that their investment is in good hands for day-to-day matters such as maintenance, and that their tenants are safe in the knowledge that they have someone to turn to in the event a need arises. Moreover, for the cost of the monthly management fee, ranging from 3-40% of the monthly gross rents, higher percentages are usually found with short term rental management and lower fees with long term residential property management, there is no need to worry about Late night phone calls about a clogged toilet.

Property managers will also ensure the yard is maintained, the utilities are being paid, the tenants are of the caliber desired, and any marketing efforts to rent the properties are being undertaken to ensure maximum rental potential. At the end of each month, a revenue statement is generated by the property manager, and a check or direct deposit is provided into the bank account the investor designates. A true passive investment.

ASSET APPRECIATION AND LEVERAGE

While your tenant is paying the rent each month or in the case of short-term rentals, multiple tenants, the note held by the investor is being paid down. Historically, real estate appreciates in value so the asset is increasing in value. As the asset increases in value and the debt is being paid down, the investor is receiving the benefit of equity growth. It is with that equity growth that the value of real estate cannot be overstated.

By tapping into the equity growth through a refinance or an equity line of credit, the investor can leverage that internal equity to purchase additional real estate. The additional real estate purchases allow the investor to generate more cash flow, and more tax benefits. Regardless of the asset type, short term, long term or commercial real estate, the benefits to the investor are tangible in the form of tax deductions while maintaining monthly cash positive receipts.

While many investors are looking at the current real estate market, it would be well worth their long-term goals to consider real estate as a supplement to their financial portfolio. As iconic long-term investor Warren Buffet said, “Be fearful when others are greedy, and greedy when others are fearful.”

Written by Brian T. Boyd, Esq.
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Opinion: Here’s the latest data on what Realtors are witnessing in the housing market

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The real estate market has shifted, and we are in a new housing paradigm. Mortgage interest rates have risen quickly in the past few months further eroding affordability. However, there are a number of attention-grabbing headlines, which unfortunately only compare today’s housing market to the very recent history of the last two years. It is always good to know where we are with the real estate market, but it is essential to keep all data in historical perspective.

The monthly Realtors Confidence Index helps to dispel many of the myths and cut through the noise of what is currently happening in the market. the National Association of Realtors Research Group has produced the index since 2008, at a time of turmoil in the real estate market. It is a monthly pulse on what is happening in the market from the perspective of Realtors who are active in the field. Questions have evolved and shifted overtime, but it is a steady resource of what is happening on the ground.

As reported in the latest NAR Existing-Home Sales, inventory still remains in tight supply, which means homes are still moving at a fast past despite the recent rise in rates and home prices. The median days on market is just 16 days — a slight increase from the record low seen in the last two months of 14 days. In comparison, in 2011, homes took 96 days to sell.

Notably, the market has contracted as fewer buyers can afford to purchase in today’s market with the rise in interest rates and the continual rise in home prices. However, in many areas of the country it does remain a seller’s market. For every home that was listed, there were 2.5 offers. This is down from the frenzied market from April of this year when every home that was listed had 5.5 offers. Historically 2.5 offers represents a competitive housing market, edging towards a balanced market.

One way to understand the competitiveness of the market is to look at buyers who are waiving contingencies. While this data series is shorter, it does reflect a slight ease that mirrors the number of offers for every home. There had been nearly one-third of buyers who waived an inspection or appraisal contingency, but the last month it fell to just over 20% for both.

Another measure of the housing market is whether a realtor had a client who had a distressed sale in the last month. Due to the consistent rise in home prices, homeowners typically do have equity in their home distressed sales are not common today. In 2008, 49% of Realtors had a client with a distressed sale, today it is only 1%. Another reason why distressed sales are likely low is that lending standards remain tight. It is difficult to obtain a mortgage today. A housing borrower must have a higher credit score, significant savings, and higher incomes to qualify for a mortgage and compete in today’s housing market.

Last month, we saw a shift in who is purchasing homes. There is a reduction in the share of all-cash buyers who may be waiving the home appraisal, and a reduction in vacation and investment purchases. All cash buyers now stand at 24%. The last high among all-cash buyers was seen at 35% in 2014.

The share of non-primary residence buyers is now at 16% from a high of 22% in January 2022. In January of 2022, there may have been buyers who were looking to purchase vacation homes as travel remained suppressed at that time. Investors may have been drawn to the market as they saw rents increase for tenants. Others may have viewed the property for both purposes: a vacation home that could be rented as a short-term vacation rental when not in personal use.

Unfortunately, the share of first-time buyers remains suppressed at just 29% last month. While it is not the high seen during the First-time Home Buyer Tax Credit in 2010, it is also not the historical norm of 40% seen in the annual Profile of Home Buyers and Sellers report. Notably, during the timeframe of the First-time Home Buyer Tax Credit, there was significantly more inventory than seen today.

To read more on the monthly Realtors Confidence Index, check out the full report the same day Existing-Home Sales is released.

Want to learn more about what to expect when it comes to the future of the housing market? This article offers a preview of our upcoming HousingWire Annual Housing Market Super Session that will feature an all-star panel of housing experts. Join us in Scottsdale, Arizona Oct. 3-5 to attend this super session that is designed to help attendees understand macroeconomic data and housing trends for the next year and beyond. To register for HW Annual, go here.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author responsible for this story:
Jessica Lautz at [email protected]

To contact the editor responsible for this story:
Brena Nath at [email protected]

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Real estate: 5 ways to invest

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For most people, the term real estate has a limited number of meanings. They tend to hear the words and think of either a private home or a piece of commercial property. But there’s much more to the concept than those two classic examples.

The computer age has given rise to an entirely new paradigm of real estate that includes an intangible asset known as digital properties. Other popular ways to invest in the broad real estate segment include income-producing rental homes, REITs (real estate investment trusts), fixer-uppers, and office condos.

The modern face of the market is both exciting and potentially lucrative for investors who prefer to park their capital in assets other than old-fashioned stocks and bonds. Here are the relevant details about the top five ways people will invest in real estate in the 2020s.

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Digitalproperties

Virtual property within the metaverse, the internet-based VR (virtual reality) world, is one of the newest assets. Those who scoff at digital real estate should regularly consider that many millions of dollars trade hands between sellers and buyers. In the real world, one principal Miami-based real estate broker offers all customers digital replicas of any tangible asset they purchase. For prospective investors, the profits are uncertain but potentially huge.

Consider that just a few years ago, digital properties sold for tiny sums but now go for several thousand dollars each. Several reputable real estate brokers and companies are exploring the digital real estate segment, and the concept is gaining wide social acceptance among serious investors. Anyone who owns real estate should look closer at adding one or more digital assets to their portfolios.

Vacation rental homes

Rental homes offer two benefits for the price of one. First, owners can purchase one in a distant city of their choosing, not to mention earn regular income. When they want to go on vacation, they can take the home off the rental market and stay in it for as long as they wish without paying for pricey hotels or someone else’s rental property. Other owners use holiday city rental houses as steady, long-term income streams to earn top dollar for peak seasons but then move into the homes after retiring.

REITs (Real Estate Investment Trusts)

Affordable shares of real estate assets are what REITs are all about. Not long ago, anyone who wanted to earn income from property ownership had to invest significant capital, deal with complicated legal documents, and take on outsized risks. With REITs, anyone can purchase tiny amounts of carefully vetted properties and avoid all the headaches of actual ownership, like landlord duties and hefty initial investments.

Fixer uppers

For at least 30 years, there’s been an active flipping market in the sector. It’s comprised of buyers who seek fixer-upper houses, renovate them, and quickly place them back on the open market for sale. Flippers operate on the principle of combining sweat equity with short-term speculation to earn a potentially positive return on every worthy fixer-upper they acquire. Initial expenses include the property itself, along with renovation work. Pursuing a side job as a house flipper can offer a steady, significant income for those with the money, time, and energy.

Office condos

Investing in office condos is a relatively easy way to get into the market as a financial backer. Some condos, most of which are located in strip malls and small commercial buildings, cost less than residential homes and require much less renovation. People who like working on the fringe of commercial real estate can begin by acquiring a single office condo, fixing it up, furnishing it, and then selling it to a willing buyer.

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