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Logistics property rents step higher amid pandemic — Prologis report

US property rents increased 3.2% in 2020

Logistics rents to increase 5% in 2021 (Photo: Jim Allen/FreightWaves)

Global rents on industrial real estate properties increased 2.9% during 2020, according to logistics real estate giant Prologis Inc. (NYSE: PLD) Even with several sectors of the economy meaningfully impacted by the pandemic, tenants were willing to pay up for logistics space.

The San Francisco-based company published its annual Logistics Rent Index Wednesday.

The report showed rents in the U.S. and Canada climbed 3.2% during the year as surging e-commerce growth accelerated need for current and incremental space. Many supply chains are reevaluating inventory needs, often opting to carry higher stock levels to avoid future shortages. Further, supply chains are seeking locations closer to consumers to shorten delivery times and improve e-commerce execution.

“[The] willingness to spend on expanding logistics networks has increased as users view e-commerce distribution and speed to market as competitive advantages for revenue generation,” the report stated. “At the same time, the incremental cost of logistics real estate remains a small portion of total supply chain costs, with rents representing approximately 5%.”

The Baltimore/Washington market led the way in 2020, recording the highest rental growth. Increased competition in adjacent markets like New Jersey and Virginia drove rents higher in Baltimore as tenants looked for less expensive alternatives.

Strong trade and tight supply in the East landed Toronto and New Jersey/New York City in the top-10 markets for U.S. rental growth. Other market leaders were gateway regions like California’s Inland Empire, Pennsylvania, Dallas and Atlanta.

Source: Prologis

The report noted that the overall 2020 growth rate deteriorated from the 8% level recorded in 2019 as new supply entered the market and the pandemic caused disruption. Prologis reported on its fourth-quarter call that net absorption in the U.S. reached a record 100 million square feet during the quarter. More than 300 million square feet of space was brought to the market during the year.

“The strength of logistics fundamentals was tested and proven in 2020 and underscored structural trends that the pandemic accelerated,” the report stated.

Not surprisingly, negative growth rates were recorded in most markets during the height of the outbreak, the second quarter, except for in Japan and Brazil, which remained positive throughout the year.

North America and Brazil (+5.9%) led rent growth in 2020 as replacement costs moved higher. Markets with excess supply like Houston, Poland and West China recorded declines.

Rent growth throughout Europe inched higher, up 0.3%, with the greater London area seeing the biggest increase.

2021 outlook

The need for increased inventories, more space and close proximity to the consumer, the result of mass e-commerce adoption, are expected to carry 2021. There is also a growing need for updated and modern space to accommodate improved supply chain technology.

However, COVID-related disruptions are expected to continue but with less severity than in 2020. The report expects economic recovery will spur along cyclical demand during the back half of 2021 but cited the speed of inoculation as a determining factor.

Growing competition for a limited number of parcels that are able to be developed is driving up land costs in the U.S., especially in infill areas. Regulatory headwinds along with resistance from community organizations are adding to development hurdles.

Inflows of capital into the logistics real estate markets, along with higher replacement costs and constrained supply, will increase competition for existing properties and new developments. The report cautioned that the “wall of capital” that has targeted industrial real estate markets could lead to “areas of oversupply.”

Prologis’ management team provided full-year 2021 expectations on the fourth-quarter call. The company expects rents to increase by 5% in 2021, with last-touch and gateway distribution markets in the U.S. leading the increase.

“Substantial structural demand tailwinds remain, replacement costs continue to rise and new supply is unlikely to meet this demand in most markets, in turn setting the tone for a year of strong rent growth,” the report concluded.

The Prologis Logistics Rent Index compiles trends in market rent growth, net of concessions, for logistics properties, along with the company’s insights on local market pricing dynamics.

Prologis’ industrial real estate portfolio stands at nearly 1 billion square feet of owned and managed properties and spans 19 countries. Roughly $2.2 trillion in goods, or 2.5% of the world’s GDP, move through a Prologis facility each year.

Click for more FreightWaves articles by Todd Maiden.

Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.