Logistics rents see 6% increase in 2023, reports Prologis

Rents paid for logistics properties saw solid gains in 2023, according to the Logistics Rent Index, which was recently issued by San Francisco-based real estate investment trust company Prologis

This annual report examines net effective rental growth trends in logistics real estate across markets in North America, Europe, Asia, and Latin America, according to Prologis.

Prologis found that rent growth for global logistics real estate rose 6% annually in 2023, following a record 30% gain in 2023, which the firm said “[underscores] the resilience of logistics real estate fundamentals,” adding that nearly all global markets saw positive rent growth amid positive demand, low vacancy, and the need to evolve supply chains as they respond to things like changing customer expectations, operational challenges, and persistent disruption.

On a global basis, Latin America saw rents increase the most in 2023, paced by Mexico’s 19% gain, with Prologis citing ultra-low vacancy, rapidly rising replacement costs, and nearshoring, which it called a secular driver, as the keys for the strong gain.

What’s more, it explained that a surge in demand in Mexico drove down its vacancy rate from a long-term average of 7% to roughly 1% in the country’s six main markets going back to 2021. And from 2021 to 2023, it said market rents rose a cumulative 40% in Mexico, with rents in the top markets up to more than $10 per square foot and replacement costs topping $120 per square foot.

Replacement costs increased in most regions during 2023, driven by higher costs for labor and materials, as well as higher interest rates, according to the report.

“Replacement costs put upward pressure on rents and drove new construction starts down by more than two-thirds from peak levels globally,” it said.

And 2023 rent growth in the U.S. and Canada was 6%, with Europe at 7%, said the firm.

Melinda McLaughlin, SVP, Head of Research at Prologis, explained that rent growth is driven by two conditions.

“The cost to build a building [rises], and therefore, developers must charge higher rents,” she said. “Replacement cost rents (a common way to summarize this force) were up in 2023 as stable materials costs, rising labor costs and a higher cost of capital outweighed downward pressure on land values. Customers bid up rents as they compete for space. In markets with low vacancy, a lack of space (especially in certain submarkets and size categories) contributed to higher rent growth.”

When asked if she expects replacement costs to see increases again in 2024, for all regions, McLaughlin said that early signs suggest replacement costs could stabilize alongside interest rates.

“We still expect upward pressure on wages, but falling construction volumes could limit cost pressure for construction materials in many geographies,” she noted.

As for continued growth in Mexico, McLaughlin said it should remain in growth mode for the foreseeable future, due to strong demand, rising replacement costs, and low vacancy all aligning to suggest further rental growth ahead.