Results of a quarterly industrial real estate survey conducted by Prologis (NYSE: PLD) showed a surge in activity in response to “strong retail sales and inventory restocking.”

After steadily increasing from a reading of 56 in the fourth quarter to 59 in the first quarter, Prologis’ Industrial Business Indicator jumped to a late-April reading of 68, “reflecting increased throughput and indicating strong future demand growth,” the report stated.

The 68 reading was the highest level reached on the index since late 2018.

Chart: Prologis

Utilization was almost 85%, which the report attributed to strong retail sales and inventory replenishment. “Restocking is underway, as seen in elevated port volumes. Retail sales are also up as stimulus efforts and job growth are boosting consumer confidence,” the report added.

“Although strong sales, lengthening delivery times and port congestion continue to drive historically low inventory-to-sales ratios, utilization is on the rise as goods make their way through the supply chain.”

The most recent Federal Reserve data showed the retailers’ inventories-to-sales ratio improved only slightly in February to 1.23x from the all-time low set in January of 1.19x. The inventory dataset remains well below levels seen prior to the pandemic of roughly 1.45x, indicating that merchandise restocking will continue at least in the near term.

The Prologis Research report said demand, across several industries and building sizes, exceeded supply for the second consecutive quarter. Demand equaled 93 million square feet during the first quarter after exceeding 100 million square feet in the fourth quarter, which was a record.

Demand strength was seen across a variety of tenants, namely those engaged in parcel delivery, third-party logistics, and food and beverage products. “Outsized demand relative to new supply is prompting significant competition for new space, with customers placing a premium on quickly securing prime logistics space,” the report continued.

Vacancy dipped 10 basis points to 4.7%, a level not seen since before the pandemic, and market rents were up 2.4%.

The improvement in trends resulted in Prologis raising its forecast for demand and supply to 300 million square feet of leased industrial real estate in 2021. Demand is expected to keep pace with new construction resulting in vacancy of 4.7%, which is close to a historic low. Increased replacement costs and the current supply-demand dynamic will drive rent increases of 6.5%, according to the report.

Construction starts increased 25% year-over-year in the quarter to the highest levels on record. Speculative starts moved into the 80% range after hovering around 70% in 2020. Prologis’ customers were also pre-leasing space ahead of completion given the lack of supply. Prologis said half of its current construction projects have already been pre-leased, which is 10 percentage points higher compared to 2020.

“Strong demand fueled a rise in speculative construction and robust pre-leasing. With completions lagging demand and growing investor interest in logistics real estate, developers are working fast to monetize zoned and entitled land — if they have it,” the report read.

The report cautioned that prohibitive replacement and land costs along with delays procuring steel and timber have lengthened project timelines, “possibly limiting future deliveries.”

“Despite increased starts in recent quarters, robust demand could lead to an acute lack of logistics space in 2021,” the report concluded.

Prologis Ventures is an investor in FreightWaves.

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