The increasing demand for e-commerce and the increased inventory and space required for the success of the electronic fulfillment platform have pushed the availability of logistics real estate to a new lowest level. But don’t expect free office space to fill the gap, according to a Monday report from Logistics Real Estate Investment Trust Prologis.
The company’s research department concluded in a report that differences in building requirements and strict zoning regulations minimize the conversion of office space to a logistics center. The group estimates that 40-80 million square feet of office space could be properly converted over the next decade.
This is less than 1% of the existing logistics space on the market and less than 3% of the annual new completions. This number is also estimated to occupy less than 10% of the additional space needed to store higher inventory levels needed to avoid future supply shocks and supply chain disruptions.
Prologis (NYSE: PLD) Logistics property vacancies Recorded the lowest ever at 3.4% In the fourth quarter, vacant offices surged to 16.6%. Office space trends have worsened throughout the pandemic as employers have introduced the option of working from home. Since the fourth quarter of 2019, the percentage of vacant offices has increased by 440 basis points.
“The surge in demand and the heightened barriers to new development have collided with the extreme shortage of the most needed logistics space,” said a Prologis Research report. “This contrast may suggest that the transition from office to logistics is likely, but difficult economics adds hurdles to the forefront of land availability, regulation and competition. To do.”
The report gives some reasons why most free space is not converted.
Logistics centers typically require at least 8 acres of much larger lots. The group said it has 1.2 billion square feet of office space on the ground floor in the top 25 markets in the United States, meeting conversion criteria. However, given the elimination of expensive Class A spaces, increased zoning hurdles and shrinking parcels, only a small percentage are likely to be converted.
“The office has limited reusability as a logistics facility and needs to be dismantled, which already adds complex processes, lengthens the development timeline and economically justifies the transformation. The rent required to do so will be increased. “
In many cases, businesses are simply too expensive. Demonstrations and rebuilds increase shipping costs, pose a risk of rezoning, and often require the removal of many different tenants. However, the report states that officesites with only one tenant are “more attractive targets.”
“Only places where premium rents can be achieved justify the high cost of conversion,” the report continued. “It is likely to target large coastal markets with high land value and limited logistics supplies, including the suburbs of New York, Southern California, San Francisco, and Washington, DC.”
Converting office properties into logistics facilities is an easier path, according to the report. Conversion of closed shopping malls and retail spaces.. Office renovations may not have the same level of “community resistance” as if they were already in an industrial area, not in a residential area. Also, the loss of sales tax revenue is not a problem.
However, “implicit loss of white-collar work” in the high-cost market was pointed out as a risk.
“Despite the potential opportunities, the trend towards logistics from offices is likely to be minimal,” the report concludes. Areas with high land value and low competition from other logistics centers offer the best opportunities.
“Resolving, dismantling, rezoning, qualifying, permitting, and approving existing contracts takes much longer than regular greenfield logistics development, so new supplies from this source will take longer to come online. It will take. “
Prologis Ventures is an investor in Freight Waves.
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https://www.freightwaves.com/news/few-empty-offices-likely-to-transition-to-logistics-centers-prologis-says According to Prologis, few empty offices could move to a logistics center.