Despite mid-year dip, rents for logistics real estate rose worldwide in 2020

Strong demand for logistics real estate drove rents higher worldwide in 2020, and the trend is expected to continue this year as demand for modern space in close proximity to customers intensifies, according to industry reports released this week.

Logistics real estate giant Prologis released its Logistics Rent Index Wednesday, revealing a nearly 3% increase in rents for industrial real estate globally last year. This came despite a mid-year dip due to the pandemic. Rents in the United States and Canada grew 3.2%, driven by strong demand for space as e-commerce and the need for last-mile delivery accelerated, especially in the second half of the year, according to the report. 

“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 researchers wrote.

Among the trends ahead for this year, Prologis says it expects accelerated e-commerce adoption to drive the need for more space closer to end customers, especially in urban areas. Pandemic-related disruptions are expected to continue, as well, but the volatility will be less severe than last year because many companies now have better supply chain visibility, they said. Rising inventory levels will add to demand growth too, and the anticipated economic recovery is expected to add cyclical demand for space in the second half of 2021.

“After a year of volatility, 2021 is expected to be a steady year of growth for most markets. We note risks to the outlook, among them the ongoing pandemic and political and economic headwinds,” they wrote. “The resilience of the logistics real estate sector has attracted significant equity; in this atmosphere, we are monitoring how this wall of capital now targeting the sector could lead to areas of oversupply. 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.”

Separately, commercial real estate giant Jones Lang LaSalle (JLL) released its Q4 U.S. Industrial Outlook, which showed that industrial leasing activity in the United States continued to set new records in 2020. They said leasing activity jumped nearly 27% compared to 2019, driven by e-commerce acceleration, and that U.S. industrial rents have increased 4.2% in the last year.

Looking ahead, JLL predicts growing demand for infill, multi-tenant facilities.

“JLL capital markets sees a growing demand for infill, multi-tenant industrial sub-class known as small bay logistics assets,” according to a JLL spokesperson. “Small bay logistics assets are 20,000- to 100,000-square-foot multi-tenant industrial buildings in dense, infill locations in primary and secondary U.S. markets. This sub-class has huge potential for rent growth driven by low vacancy.” 

The reports came on the heels of the January Logistics Manager’s Index report, which also pointed to strong industrial real estate trends in the form of tightening warehouse capacity and rising inventory levels across the supply chain as 2021 got underway. Inventory levels continued to rise during January as warehouse capacity tightened, making it difficult and more expensive for companies to “find a place to put things,” as LMI researcher Zac Rogers, of Colorado State University, explained. He said inventory costs are the highest they’ve been in two years and that the situation “really demonstrates the tightness people are dealing with.”

Rogers said he expects the warehousing capacity crunch to continue, noting the LMI’s future predictions index calls for available warehousing to roughly maintain the status quo over the next year.