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Economy Drives Up Warehouse Rents

The United States led the world in logistics market rent growth in 2016 by rising 5%, and major coastal markets near large consumption centers outperformed all other markets, according to Prologis, the global industrial real estate company.

In contrast, in Europe market rent growth was 3%, although it is gaining momentum, Prologis notes. Overall, global rents rose an average of 4% in 2016.

The operating environment in the U.S. is the strongest in the world and the best in Prologis’ three-plus-decade history, the company says.

Vacancy rates fell below 5% for the first time in 2016 and demand remains robust, fueled by the combination of the recovering economy, the growth of ecommerce and an expansion in demand that is helping to fill new development.

“In many instances, scarcity means customers have relatively few alternatives,” Prologis points out. “Such momentum has generated a big change in rents, which are up more than 35% from their lows during the global financial crisis.”

Strong growth continued in 2016, by 5% nationally. Excluding the softest market (Houston), growth in the U.S. would have been nearly 40 basis points higher in Prologis’ formulation of market growth.

“More generally, growth was strongest in the major population centers and in markets with higher barriers to entry,” the company says. “In just the major coastal markets, rent growth was more than 150 basis points higher than all other U.S. markets.”

The more than 35% rise in market rents in the last few years moved in-place rents more below market than at any point in recent history, Prologis notes, adding that the gap between in-place versus market rents should narrow when rental growth stabilizes.

“On average, new lease rates were 20-25% higher than prior rates,” the company says. “Given the low market vacancy and strong competition for space, customers with a thorough planning process and the ability to act stand the best chance of securing the space they need at the most attractive price.”

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