Global prime logistics rents remain on an upswing, says CBRE report

Given the strong economic outlook at the moment, it stands to reason that there have been various subsequent takeaways. One key one was highlighted in a report recently issued by commercial real estate firm CBRE, whose main thesis was that for the year ending March 31, global prime logistics rents saw gains, due, in large part, to the improving global economy, as well as increased demand for goods bought both at physical store locations and online.

The report, entitled “2018 Global Industrial & Logistics Prime Rents,” defined prime logistics rents as the “highest rent for industrial distribution space of the highest quality and specification in the best location for each market.” And for the year ending March 31, 2018, it found that these rents rose 3.2% annually, topping the previous 12-month period, which saw a 2.2% increase in prime logistics rents.

“This is a positive indicator that we're still seeing global growth roughly six years after the U.S. market for Industrial & Logistics real estate began its recovery from the recession,” said David Egan, CBRE's Global Head of Industrial & Logistics Research. “This underscores the theory that e-commerce-driven demand for logistics facilities has created a fundamental shift in this market, establishing new baselines for occupancy, rents and other measures.”

In its research, CBRE looked at rents in 71 global logistics hubs. The tope ten fastest growing markets, which CBRE ranks by the annual percentage change in prime taking rent in the local unit per annum, included: Vancouver, 21%; Beijing, 19.8%; Oakland, 14%; Seattle, 13.4%; Budapest, 11.1%; London, 10%; New Jersey, 9.5%; Tilburg/Eindhoven/Venlo, 9.5%; Paris, 8.3%; and Manchester/Liverpool 8%.

CBRE said that of the 71 global hubs it tracked, 49 recorded an annual increase in prime rents, 11 had decreases, and 11 remained unchanged.

The EMEA (Europe, Middle East, Africa) region saw prime logistics rents rise by 4.3%, coming in ahead of a 1.2% gain the prior year, according to CBRE. This outpaced the Americas, at 3.8%, matching the prior year, and Asia's 2.2% gain, outpacing a 1.4% improvement the year before.

“The biggest difference [compared to a year ago] in this report is that Europe is catching up, whereas gains in the Americas and Asia are largely the same as last time,” said Egan. “While the European market had shown some growth for a while, it lagged globally, especially when compared to some other parts of the world. Part of the reason for that was that the economic recovery of the EU was slower than it was in the U.S. and Asia. Another factor was that the conditions on the ground in Europe are different than in the U.S. One of the things driving rent in the U.S. had been the supply-demand imbalance and a tremendous amount of competition for those spaces, as well as not a lot of supply. Where we are building is relatively expensive, so rents are going to be at a much higher number. Europe did not have that dynamic as much over the first part of this cycle and did not have a lot of development. And in areas where they did have development, it was in areas that were relatively cost-controlled that were not land-constrained so developers were able to get into these projects with a relatively low land basis.”

Land basis, said Egan, tends to be one of the biggest variables in construction costs, as opposed to other costs, like raw materials and development costs, which tend to be somewhat consistent across markets.

And with land being somewhat plentiful and expensive, Egan said that the costs of new construction have been down, which, he said, has created an unusual dynamic in which new construction costs in major markets for projects coming in can have lower rents than existing projects, because the developers are able to build to such a competitive price, due to the cost inputs being fairly low.

“That was a big governor to growth in Europe for a while, but that has flipped over the last year and a half, with building costs going up and land parcels rapidly being absorbed, with land getting more expensive,” he said. “What we are seeing in Europe is market conditions that look like the U.S. in 2014-2015, where we had a really big pop in the U.S. We are starting to see development costs go up, and land supply is getting very constrained, and then you layer the economic recovery picking up steam on top of that much later than in the U.S., and it is an economic boost as well.”

The growth in Europe really confirms the broader theme that what is happening there confirms the broader theme that there is a big global structural change in the market, with how tenants are using properties and the locations they are looking for, too, said Egan. He added that it is not region-specific.

“It is really a broader e-commerce supply chain consumption-driven type of dynamic,” he said. “It is truly global; there is not a part of the world where it is not happening.”

In the Americas, the report said that supply chain and e-commerce dynamics have fueled rent growth at different rates, with the U.S. and Canada setting the pace.

CBRE said that tenants have aggressively leased space in response to both persistent economic growth and the structural shifts resultant from e-commerce, which has, in turn, led to record low vacancy rates and record-high rents in nearly all U.S. and Canadian markets.

And while the U.S. economic cycle was called “well-advanced” by CBRE, the report pointed out that e-commerce and omnichannel retailing are still in the early stages of development. Taking that a step further, CBRE said that e-commerce sales are up 15.2% annually going back to 2010, with total retail sales up 9.4% annually in the first quarter of this year, up from 7.8% two years before that. CBRE said this data shows how “demand for high-quality, well-located logistics real estate is justified and is not expected to wane anytime soon.”

SC
MR