2019 Market Rents in Review: Operating conditions and development economics align to drive above-trend growth
- 6% global rental growth extended the robust growth of recent years.
- In North America, land-constrained metropolises led with the fastest growth.
- In Europe, firming market conditions produced 5% rental growth.
- In most geographies around the world, rent concessions have declined.
Why does it matter?
- Numerous factors, including land scarcity and rising replacement costs, have aligned to put upward pressure on rents.
- Persistently strong demand has prompted competition for space amid low availability, especially in premier consumption markets.
- Solving for logistics fulfillment needs must also take into account operating efficiencies and, importantly, labor.
- The structural trends that to-date have been the force behind demand for space in spite of global economic uncertainty should continue to drive logistics users to expand their networks.
- As direct-to-consumer delivery options expand, the need for store networks to quickly replenish inventory is driving fulfillment operations to city centers.
- Recent records for rents in new product both showcase the need for well-located space and support the argument for increased rent growth assumptions in development underwriting, boosting land prices.
- Rent growth outperformance will likely be most pronounced in Last Touch® locations with large, high-income consumer bases.
2019 RENT GROWTH BY MARKET, TOP 70 LOGISTICS CLUSTERS GLOBALLY
The Prologis Logistics Rent Index examines trends in net effective market rental growth in key logistics real estate markets in North America, Europe, Asia and Latin America.1 Our unique methodology focuses on taking rents, net of concessions, for logistics facilities. To produce the index, Prologis Research combines our local insights on market pricing with data from our global portfolio. Rental figures at regional and global levels are weighted averages based on estimates of market revenue.
- North America and Europe led 2019 growth. Rent growth outperformed long-term trends by 2-3x.
- Growth was broad-based. Three quarters of markets showed growth between 2-8%.
- Location premiums increased, due to low vacancies and rising replacement costs. Rent growth varied at the submarket level, where Last Touch locations are in demand.
- Local market balance outperformed uneven economic conditions. For example, Germany and Brazil achieved 6% rent growth.
- Trade policy has had limited impact. For example, gateway markets in the U.S., Europe and China performed above-trend, a testament to the resilience of the consumer markets.
2019 TOP MARKET RENTAL GROWTH PERFORMERS, GLOBAL
Looking to 2020:
- Uncertainty around economic conditions and geopolitics will continue. Progress was made on trade issues (Brexit, NAFTA and U.S.-China Phase 1) in 2019, but much remains to be settled. Although leasing decisions have not thus far been affected, dampened sentiment is an important watch-point.
- Structural factors should support strong demand. Even during times of uncertainty, logistics customers keenly understand that their competitive advantage is tied to a modernized supply chain. There is no reason to think this sentiment will change.
- Labor continues to be a challenge. Access to transportation nodes is a key criteria not only for operational excellence but also for staffing.
- Interest rate declines could impact development economics. Developments may become more feasible, yet land sourcing will remain a key barrier.
- Major consumption markets are likely to record strong rent growth. The intersection of the need to lease space near end consumers and high barriers to supply puts upward pressure on rents for highly functional spaces.
What does it mean for customers?
Availabilities should remain limited in most markets in 2020, making it even more imperative for logistics users to plan well in advance to secure space. The best locations and buildings will achieve operational efficiencies in the form of reduced transportation costs (time and distance) and access to labor.
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About Prologis Research
Prologis’ Research department studies fundamental and investment trends and Prologis’ customers’ needs to assist in identifying opportunities and avoiding risk across four continents. The team contributes to investment decisions and long-term strategic initiatives, in addition to publishing white papers and other research reports. Prologis publishes research on the market dynamics impacting Prologis’ customers’ businesses, including global supply chain issues and developments in the logistics and real estate industries. Prologis’ dedicated research team works collaboratively with all company departments to help guide Prologis’ market entry, expansion, acquisition and development strategies.
Prologis, Inc. is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. As of December 31, 2019, the company owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 814 million square feet (76 million square meters) in 19 countries.
Prologis leases modern distribution facilities to a diverse base of approximately 5,000 customers across two major categories: business-to-business and retail/online fulfillment.