United States/Canada
Structural drivers form the foundation for another year of U.S. outperformance. As logistics space becomes more valuable for revenue generation, especially in the most densely population areas, North American rents have risen steadily, with 8% growth in 2019. North American real rental growth over the last three years was the strongest among global peers. Operational efficiencies achieved by upgrading to modern product also renewed demand for new, larger facilities in many submarkets across North America.
Rising replacement costs and improved building features are pushing rents to new heights. In addition to competition for limited space driving up rents, development economics also played a larger role in 2019. Replacement costs for logistics buildings rose swiftly, driven primarily by land as developers compete to serve this growing need. In some high-density locations, land prices have roughly doubled over the past few years. Construction costs have also grown across North America, up about 3-5% in 2019 after growing 9% in 2018. Wages, material costs and municipal fees all contribute to this growth.
These trends are intensified in supply-constrained areas. In general, the closer a logistics facility is to end consumers, the stronger the demand from potential users and the less land there is to construct new facilities to satisfy that demand. This dynamic has produced historically low vacancy rates and heightened competition for both existing space and land. As a result, highly supply-constrained global metropolises recorded the strongest market rent growth. Toronto (18%), NJ-NYC (17%), Southern California (12%) and Seattle (12%) posted the highest rent growth among U.S. and Canadian markets in 2019.
Exhibit 3
EFFECTIVE MARKET RATE, U.S./CANADA
$/sf/yr
Exhibit 4
2019 TOP MARKET RENTAL GROWTH, U.S./CANADA
Europe
The strongest rent growth in history happened in 2019. Net effective rents rose more than 5% for Europe as a whole, the highest level ever recorded. This growth is driven by headline rent growth as, after several years of concession reductions, many markets across Europe are currently at very low levels of incentives such as free rent.
Historic low vacancy and rising replacement costs fueled growth. Operating fundamentals remained strong in 2019. New supply in line with robust demand produced a vacancy rate of only 3.7% in Europe—the lowest among global peer regions. Land scarcity is only increasing in the markets that matter most. Furthermore, replacement costs continued to rise briskly, driven by construction costs and land prices. In turn, development underwriting incorporates higher rental rates to achieve required returns.
The European continent experienced outsized growth of 6%+ for the third consecutive year. Two notable rent trends emerged in 2019. First, mature markets such as in Rhine-Ruhr, Southern Netherlands, Stockholm and Prague saw continued strong rent growth. Upbeat sentiment and scarcity pushed rents higher in these markets. Second, growth materialized in markets that are still in the early phase of the rent cycle, including those in France, Italy and Poland. Improving market conditions and rising replacement costs together are putting upward pressure on the relatively low rents found in these markets. Interestingly, seaport markets with an exposure to global trade recorded solid growth, as well. Rotterdam and Hamburg, one of Europe’s largest container hubs, posted growth above 6%. These markets have shown resiliency due to land scarcity and deep, diverse demand despite recent trade tensions.
Exhibit 5
EFFECTIVE MARKET RATE, EUROPE
€/sqm/yr
Exhibit 6
2019 TOP MARKET RENTAL GROWTH, EUROPE
Latin America
Mexico saw soft real market rental growth. Logistics operating environments in the country’s six main markets remain mostly in equilibrium, as overall market vacancy remained stable at ~4.5%.2 Logistics real estate demand notably outpaced the broader economy. However, the global slowdown in manufacturing and weak domestic business confidence were drags on rents in 2019. Overall, market rental growth expanded slightly in 2019, but still was below CPI and less than what low vacancies and a healthy economic climate in the U.S. otherwise indicate.
Bright spots are emerging in Brazil. After lackluster performance in recent years, the recovery in Brazil is on the upswing. Total market vacancy remains elevated, but operating conditions for modern product in the best submarkets with secure locations normalized in 2019. Market rental growth in those submarkets exceeded local inflation. Capital flows to logistics real estate remains strong, aided by 200 basis points of cuts to the SELIC rate (Brazil’s overnight lending rate)—a tailwind for strong cap rate compression. Real market rents remain ~35% below their prior cycle peak in 2014 and the cyclical economy appears to have a stronger footing.
Asia
In Japan, rent growth held steady. Alongside stable economic conditions and improving logistics real estate fundamentals, all of Japan’s submarkets maintained slightly positive rent growth between 0.5% to 1.5%, still below trend but in line with currently low inflation. Previously supply-impacted submarkets in Tokyo and Osaka recovered throughout 2019, with record demand levels absorbing new and existing supply, leading vacancy rates down to low single-digits overall. Last Touch assets in Tokyo posted the strongest rental gains; those gains, however, are modest compared to other dense, global markets.
In China, rental growth diverged between established and emerging markets. Tight supply conditions in top metropolitan areas led to healthy growth of around 5%. Strong and diverse customer demand within the integrated city clusters drove pricing, particularly for Shanghai, Beijing and Guangzhou. In contrast, markets with fewer supply constraints, especially West China, experienced rental declines owing to a temporary supply cycle combined with weakness in the auto sector. However, submarket differences exist: those located closer to urban centers experienced stronger growth generally, underpinned by demand from 3PLs and retailers. With trade-linked markets still solidly in expansion owing to their large consumer bases, geopolitics have not dented the logistics real estate sector, though it remains a key risk for the broader environment.
2020: The Prologis research outlook
2020 shares similarities to 2019—tight local market conditions, intensifying focus on modernizing supply chain strategies and consumers on solid footing—yet they are set against a backdrop of uncertainty stemming from geopolitics and economic crosswinds. As market balance between demand and supply has proven to be the primary determinant for rental trends, Prologis Research expects continued strong rental performance in 2020. Cases of outperformance are likely to emerge in areas with structural barriers to development in the form of land constraints, stringent zoning and labor access, reflected in high land and construction costs. While any loosening in interest rate policy could make development more feasible, the availability of development sites will remain a hurdle.
Appendix: Concession levels globally
Throughout this report, Prologis Research tracks rental rates on a net effective basis. Net effective rents are principally net of free rent. By doing so, we can capture changes in the true economic terms of the offer. Since our 2016 paper, concessions have declined globally, as shown below:
Exhibit 7
CONCESSIONS, GLOBAL
Months per year
Endnotes
Note: Regional and global rental growth rates referred to throughout are weighted averages of market-level growth rates, using estimates of market revenue as weightings
1. The Prologis Rent Index was introduced in 2015 as a way to quantify and analyze rental growth trends across the global logistics real estate sector.Weighted by estimated total market revenue; market rent growth weighted by PLD NOI is ~8%
2. CBRE, NAI, Solili and Prologis view of modern stock
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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.
About Prologis
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.
