Prologis Reports on Logistics’ Global Growth

A key takeaway: Rents posted considerable gains in 2018, increasing 8 percent in the U.S. and 6 percent worldwide.
Chris Caton
Chris Caton, Global Head of Research, Prologis

Prologis’ Logistics Rent Index examined the global landscape of logistics real estate and revealed rents on a global scale rose 6 percent.

“Rent growth globally in our industry—logistics real estate—has been incredibly strong and remains incredibly strong,” Chris Caton, Prologis’ global head of research, told Commercial Property Executive. “The U.S. is a market that has had critical growth over the last four or five years and that continued last year as well.” In fact, in the U.S., rent growth rose 8 percent, led by numerous factors driving the market forward, including a healthy demand for space.

“You had had a really healthy economy so there’s been a cyclical uptick,” Caton said. “We have a wide range of customers and some of them benefit from the economic cycle.” Moreover, there are structural drivers in the industry, he said, with many looking to e-commerce as a catalyst.

“Healthy communities are one driver; two is vacancy rates are at all-time lows and there’s been a real scarcity in many markets in the U.S. which are at historic low levels,” Caton said. “Third is customers are really prioritizing their logistics real estate. Logistics real estate is a key factor for executing a successful concept and so we see our customers willing to step up and pay for good quality space.”

Areas in the U.S. with the highest rental growth were the San Francisco Bay Area, Seattle, Southern California, New Jersey/New York and Austin, Texas.

Other regions posted large increases as well, with China leading the pack with 8 percent growth, the fastest growth in the world. Europe, meanwhile saw rents rise 5 percent, nearly doubling in growth from the year prior.

The top five markets in Europe were Rotterdam, Budapest, Prague, Greater Silesia and Hannover. “Europe had been lagging and rent growth was on a net-effective basis, so very strong growth there,” Caton said. “I think what that means is for people who participate in logistics real estate, staying current on the market is more important than ever before. The rent that customers are paying to lease space, because these are multi-year contracts, regularly five years or more, the rent that folks are paying can often be materially different from what market rent is so staying current on the market is really important.”     

Construction recovery

The report noted that new construction costs are increasing at historically high rates, prompting mid- to high-single-digit annual growth with leading markets well into double digits.

“We expect new deliveries in the calendar year 2019 to be 260 million square feet, which is about the same level as last year and it’s up from years prior,” Caton said. “It’s really been building steadily over the last seven years and it has come on at a pace of recovery that has been slower than many anticipated, particularly considering the strong fundamental performance, as well as the value performance of the industry.”

Looking ahead, Prologis forecasts that despite macro volatility, market vacancy rates will remain at historic lows in 2019, causing higher rental higher in pursuit in the U.S. Additionally, strengthening conditions in Europe are expected to shift growth leadership towards the region.

“Business is good but at the same time, there seems to be more uncertainty than we’ve had in a while and a lot of that is political in nature and that could cause a slowdown in the macro economy and that could influence logistics real estate, too,” Caton said. “On the one hand, I think it’s appropriate at this stage in the year to be prudent and watchful. On the other hand, if I’m a customer and I’m planning on leasing space later this year or next year, I think it’s been a really hard operating environment for those customers. I think the customers with a thorough planning process and ability to act early stand the best chance of securing space at the best rate.”

In January, Prologis launched construction on two Class A industrial facilities in the Los Angeles area totaling more than 346,000 square feet.

Image courtesy of Prologis