Era of Scarcity: Rent Growth Doubles Prior Record

Introduction

2022 was a year of record global rent growth in nominal and real terms, since Prologis Research began tracking in 2007. Global rents grew by 30% year-over-year (real growth 21%), accelerating significantly beyond the prior record of 17% (10% real in 2021)ⁱ. The restructuring of global supply chains for added resilience, in conjunction with the build-out of e-fulfillment capabilities produced strong demand for space. Competition for space in 2022 continued to be intense as increased land scarcity, rising regulatory barriers and escalating construction costs slowed new supply in prime locations.

The Prologis Logistics Rent Index combines our expert local market insights and proprietary data to examine net effective rental growth trends across markets in North America, Europe, Asia and Latin America. Rental rates at the regional and global levels are weighted averages based on estimates of market revenue (market stock multiplied by market rental rate).

Takeaways

• The U.S. led a widespread acceleration in rent growth. Competition for space increased as vacancies dropped, which was most evident in the U.S. where customers made rapid changes in real estate strategies in response to supply chain disruption.
• De-risking of the global value chain drives structural demand. Properties located near the end consumer and with access to high-quality infrastructure were in highest demand and should continue to outperform.
• Customers want space in locations where it’s nearly impossible to build. Construction activity is up but inconsistent across geographies as regulatory barriers increase and land becomes increasingly scarce. 
• Surging construction costs drove rents higher. Rapidly increasing construction costs (and, more recently, cap rate expansion) create higher rents to support the cost and risk of development.

Building costs rose as materials ran short and supply chains were disrupted by COVID-19, the war in Ukraine, labor turmoil and rapid inflation. As a result, material costs rose 39% in the U.S./Canada and 35% in Europe in 24 months (October 2020- 2022).4 Rising construction costs, in combination with land acquired at peak pricing, caused developers to increase rents to support new development. Growing replacement costs underscored rent growth across markets, but the relationship was strongest in land-rich locations where new supply can rise quickly to meet demand and trader-developers build at low margins, such as Poland. Supply chain pressures are starting
to ease, which is reflected in material costs stabilizing in some markets and falling in others. The expected declines in material costs and land values in 2023 are offset with yield expansion, requiring higher rents to justify the risk of development. 

Location is key as transportation costs fluctuate substantially and consumer service level demands remain high. As a result, markets with high-quality infrastructure close to the end consumer are likely to outperform. After 2022’s record rent growth of 30%, we expect to see normalization in the pace of rent growth driven by a slower pace of deal-making (as economic growth and urgency cools) and increased supply in some marketsi. Structural forces, including e-commerce growth and supply chain reconfiguration, are likely to drive expansion through the cycle. Regulatory barriers, land scarcity and rising capital costs, however, will continue to limit new supply and, in the most constrained markets, leasing conditions are unlikely to ease.

Regional Highlights

Rent growth in the U.S./Canada accelerated to an all-time high of 34% year-over-year.¹ With vacancy rates at record-low levels in most locations and widespread demand, rent growth was strong across many markets. The vacancy rate hovered in the low 3% range through 2022.² Our customers reported both strong activity and high utilization of space throughout the year. The IBI, our proprietary survey of customer sentiment, showed activity at a healthy 60 and utilization rate a high 86% at year- end,³ indicating minimal shadow space and a continued need for warehouse space to accommodate future growth. The pace of decision-making is normalizing and, with growing economic uncertainty, not likely to reaccelerate next year. At the same time, users will have more options due to the record pipeline of 545 MSF across Prologis’ 31 markets. Against that backdrop, while rent growth will likely slow from its recent robust pace, it should maintain a healthy rate above inflation.

Rents grew at a record pace in Europe in 2022, rising 15% year-over-year. 2022 year-end vacancy was near the record low at 2.7% , leading to an acceleration of rents across markets. We see a clear relationship between true months of supply (TMS)/supply risk and rental growth as the growth trajectory was steepest in those locations with the lowest vacancy and highest barriers to supply, e.g., Prague (0%). Significant increases in replacement cost (accelerated by the war in Ukraine) pushed rents upward, even in more land-rich locations. Take Poland, for example, where rents increased more than 20%, a market that has lagged in the past.

Development slowed in 2022, and lower completions are expected to coincide with softer demand in 2023, allowing for only a moderate rise in vacancy. An economic slowdown could further soften market conditions, although market vacancy rates are exceptionally low and may only rise moderately, offsetting negative cyclical impact on rent growth. Indeed, rents rose (3%) in Q4 2022, even as the macro landscape became more uncertain.ⁱ