Global logistics rents to grow more than 5 percent annually, says Prologis

Prologis Inc., a leading global owner, operator and developer of industrial real estate, recently published an in-depth analysis of global rents for logistics facilities in a paper titled “Entering the Sweet Spot in the Cycle for Logistics Real Estate: An Extended Rental Rate Expansion.”

In the report, the company’s research team estimates overall rents will grow by more than 5 percent per year from 2014 to 2017, reaching a total increase of 20 to 25 percent during the four-year period. This outlook is supported by a trend in structural drivers and a recovery in operating fundamentals.

“Rents today still don’t broadly support new construction, but tightening vacancy rates are reversing that dynamic,” says Chris Caton, vice president and head, Prologis Research.  “In addition, as replacement costs rise with global economic expansion, we expect the rent required to justify new construction to rise in kind and lead to an extended period of pronounced rent increases, particularly in cyclical recovery global markets in the U.S. and Europe.”

Rent forecasting involves the consideration of many components, adds Caton. According to the report, rents in the largest markets – the U.S. and Europe – do not yet support broad based construction and rents will continue to increase.

Structural drivers such as construction costs, land values and cap rates must be weighed against cyclical vacancy trends to determine rent growth.

As replacement costs rise as the global economic expansion takes hold, Prologis expects the rent required to justify new construction to rise in kind. Caton said in an interview that supply chain managers may begin “locking in” long-term leases as a consequence.

“This dynamic should limit the pace of new development, leading to an extended period of pronounced rent increases, particularly in our cyclical recovery markets in the U.S. and Europe,” says Caton. 

Furthermore, Prologis expects stronger pricing power due to very tight operating metrics in China and a higher inflation factor in Brazil.