Archives for May 2024

NAR and other housing groups say it’s a critical step in addressing some of the national real estate market’s biggest challenges. A group of lawmakers on Capitol Hill have announced the new Bipartisan Congressional Real Estate Caucus, which will address the lack of housing affordability and inventory nationwide.

According to industrial CRE giant Prologis, its Industrial Business Indicator Activity Index showed an April level of activity “consistent with demand generation, supported by macro data that reflects restocking inventories amid resilient consumption activity, although realized net absorption has lagged.”

However, that is paired with a continued reduction of industrial construction, setting up an ongoing and future lack of supply, with greater competition for space in 2025 and, presumably, rents rising.

The IBA Activity index was 56.3 in April, down from a 58 average present in the first quarter of the year. According to the company, macro drivers of activity were “solid” with core retail sales showing 1.1% month-over-month growth in March and a 4.5% year over year. “Adding to demand drivers, the more logistics-intensive e-commerce channel outperformed with 2.7% month-over-month and 11.3% year-over-year growth while in-store sales grew 0.4% month-over-month and 2% year-over-year in March,” they said.

Facilities utilization was about 85% in both March and April. That’s up from a low of 83% in the last quarter of 2023.

“Despite a strong rise in import volumes, sales outpaced inventory growth, pushing down the inventory-to-sales ratio to 1.24, approximately -3% below the 2019 average. This points to further need to build inventories, particularly for wholesalers.”

A lack of warehouse space could also have more extended impact on logistics, leaving less room for products coming into the country.

The company also noted that net absorption of 26 million square feet underperformed what might have been expected. “IBI readings and macro data suggest logistics real estate demand growth should be higher than what was realized in Q1,” they said.

Prologis pointed to two major but temporary factors. One was that some customers had been able to accommodate growth using capabilities in their existing networks, which the lower utilization rates and a rise in sublease space in some markets indicated. But there are likely only one or two more quarters worth of extra space left, as the 84.4% April utilization rate was below the more typical 85% to 86%. In addition, sublease space growth slowed everywhere other than Seattle and Southern California.

The second factor was economic uncertainty and an emphasis on cost control delaying decision making. “Evidence of this trend includes extensive property tours, longer deal gestation times and delayed occupancy dates, even with a rise in proposal activity,” they wrote.

With Q1 deliveries down by more than a third from 2023 Q4, there’s an end to record completions with tight construction financing and costs.

Prologis estimates that the result of accumulated pent-up demand and fallen construction of new supply will mean peak 2024 vacancy in the mid-6% range, which will fall to mid-5% in 2025.

Source: “Industrial Development Lags Current and Future Demand“

Boston Properties (BXP), one of the largest U.S. office landlords, reported strong leasing activity in the first quarter, with tenants opting to take longer-term leases that they did a year ago.

The REIT inked close to 900K SF of leases in Q1, a 35% increase compared to the Q1 2023 total of 600K SF, with a weighted average lease term of nearly 12 years, up from last year’s average of about eight years.

BXP focuses on high-end properties in central business districts—the company calls them “premier workplaces”—which have been outperforming the broader office market by wide margins, CEO Owen Thomas said in an earnings call this week.

“We are continuing to defy the negative market sentiment for the commercial office sector,” Thomas said.

BXP defines premier workplaces as “the best 6% of buildings representing 13% of the total space” in the CBDs that are the lion’s share of company’s portfolio, including NYC, Boston, San Francisco, Seattle and Washington DC.

Thomas said direct vacancy for premier workplaces is 11.2% versus 17.9% for the broader office market. Net absorption for premier workplaces has been a positive 7M SF over the last 13 quarters, compared to negative 30M SF for the broader market, he said.

“Asking rents for premier workplaces are [now] 50% higher than the broader market, a widening gap from prior quarters,” he said.

“This outperformance is evident in BXP’s portfolio, where 89% of our NOI comes from assets located in CBDs that are predominantly premier workplaces. These CBD assets are 91% occupied and 93% leased as of the end of the first quarter,” Thomas said.

BXP’s leasing activity in Q1 included 32 new leases encompassing 494K SF and 29 renewals encompassing 399K SF.

Doug Linde, BXP’s president, said during the call that the REIT’s office properties in Boston’s Back Bay and along NYC’s Park Avenue “continue to have outsized demand relative to our availability.”

“While concessions are still at elevated levels, we’ve been able to increase our taking rents and we actually have clients that we cannot accommodate due to a lack of available space in certain buildings,” Linde said.

Source: “This Office Landlord Reports Strong Leasing, Longer Terms“

Online grocery sales are projected to increase at a compound annual growth rate (CAGR) of 4.5% over the next five years, more than three-times faster than the 1.3% CAGR anticipated for in-store grocery sales during the same period.

Total online grocery sales—which includes delivery, pickup and ship-to-home—are projected to reach nearly $120B annual by the end of 2028, a 12.7% share of total grocery sales in the U.S., up 170 bps from the 2023 share, according to a new U.S. eGrocery Sales Forecast from Brick Meets Click.

Overall grocery sales in the U.S. are projected to grow at a CAGR of 1.6% through 2028, which is much slower than the 5.6% annual surge in sales during the five years ending in 2023, which was driven by the pandemic and then inflation.

The 4.5% CAGR forecast for online grocery sales could be pushed even higher by Amazon’s aggressive plans to expand same-day deliveries of groceries, including perishable goods. During a Q1 2024 earnings call this week, Amazon CEO Andy Jassy touted a new benefit for Prime members offering unlimited grocery deliveries.

“We just launched a Prime delivery grocery benefit that lets customers receive free unlimited grocery delivery for just $9.99 a month, which is great value and customers are responding accordingly,” Jassy said during the call.

In his annual letter to shareholders earlier this month, Jassy said Amazon will double the number of same-day fulfillment centers it has opened—from the current total of 58 to more than 100—and expand its capacity to delivery “everyday essentials,” a market segment that grew 20% in a year-over-year comparison in Q4 2023.

Jassy reported that Amazon in 2023 increased the number of items delivered same-day or overnight by nearly 70% year-over-year. The online retail giant is focused on speed—it can assemble and ship customer orders at same-day facilities in as little as 11 minutes—and increasing its share of the growing market for same-day delivery of perishable food and medicine.

A year ago, Jassy announced a coast-to-coast reorganization of the e-commerce giant’s national fulfillment network into eight interconnected regional hubs managed by AI-driven algorithms that predict what customers in the hubs will need and guide inventory placement systems.

With same-day fulfillment centers in the largest U.S. metro areas each stocking 100K SKUs, Amazon views the expansion of same-day delivery as a “core building block” for the company’s retail grocery and pharmacy business, Jassy said.

“What if we used our same-day facilities to enable customers to easily add milk, eggs, or other perishable items to any Amazon order and get same day [delivery]? It might change how people think of splitting up their weekly grocery shopping and make perishable shopping as convenient as non-perishable shopping already is,” the Amazon CEO said in his letter.

In the earnings call this week, Jassy said Amazon has launched same-day delivery of prescription medications to customers in eight cities, including Los Angeles and New York City, with plans to expand to more than a dozen cities by the end of this year.

Amazon’s pilot program for drone delivery of medication, which the company introduced at College Station, TX—it’s called Prime Air—is “making substantial progress” and will expand in the near future, Jassy said in his letter to shareholders.

“Drones will eventually allow us to deliver packages to customers in less than an hour. It won’t start off being available for all sizes of packages and in all locations, but we believe it’ll be pervasive over time,” Jassy said. “Think about how the experience of ordering perishable items changes with sub-one-hour delivery.”

Source: “Online Grocery Sales to Grow 3X Faster Than In-Store“