Prologis Logistics Rent Index 2023: Solid Global Rent Growth and New Leading Locations

Global logistics real estate rent growth totaled 6% in 2023, underscoring the resilience of logistics real estate fundamentals. Nearly all markets globally recorded positive real rent growth, amid positive demand, low vacancy, and the need to evolve supply chains in response to changing consumer expectations, operational challenges and persistent disruption.

The Prologis Logistics Rent Index combines our expert local market insights and proprietary data to examine net effective rental growth trends across markets in North America, Europe, Asia, and Latin America. Rental rates at the regional and global levels are weighted averages based on estimates of market revenue (market stock multiplied by market rental rate).

TAKEAWAYS

• Latin America led the world as Mexico rents surged 19%, driven by ultra-low vacancy, rapidly rising replacement costs, and the emergence of nearshoring, a new secular driver.
• The majority of markets posted positive real rent growth. Only a small handful of markets, either those that cooled from record levels of rent growth in 2021/2022 or had excess supply, pulled down global and regional averages in 2023.
• Replacement costs increased in most regions during 2023, driven by higher costs for labor and materials, as well as higher interest rates. Replacement costs put upward pressure on rents and drove new construction starts down by more than two-thirds from peak levels globally

GLOBAL TRENDS AND OUTLOOK

Mexico nearshoring fuels pricing as space remains scarce.
Nearshoring amplified demand in Mexico’s manufacturing-oriented markets compared to historical levels (e.g., Monterrey’s net absorption was three times pre-pandemic levels). Replacement cost inputs responded: Land values increased two to three times, and peso appreciation (+25%) added to construction cost growth. Because the surge in demand pushed the vacancy rate down from a long-term average of 7% to around 1% since 2021 throughout Mexico’s six main markets, customers had to compete for limited availabilities. From 2021 to 2023, market rents increased a cumulative 40% in Mexico. Rents in the best markets surpassed US$10 per square foot as replacement costs climbed above US$120 per square foot.

Development economics drive rent growth and a pullback in starts.
The costs to develop buildings are higher than ever in most markets around the world. Construction costs surged in 2021 and 2022. Construction wage growth continues to outpace inflation, and rising riskfree interest rates pushed up debt costs and return requirements. There was some global divergence in 2023: boosted by competition from manufacturing and infrastructure projects, construction costs increased in the U.S. but decreased in Europe.

THE SOUTHERN CALIFORNIA OUTLIER

Rents in Southern California increased by a cumulative 110% since 2020, including a 7% decline in the fourth quarter of 2023. Future demand uncertainty spiked early in 2023, caused in part by falling import volumes at the ports of Los Angeles and Long Beach, which were created by the intersection of four forces outlined in September’s Market Environment article. The combination of unprecedented rent growth and shifting demand drivers allowed property owners substantial room to negotiate on rents to secure occupancy. Looking ahead, the foundation for a reacceleration in rent growth is solidifying. The construction pipeline is down by half since year-end 2022 due to anemic starts. Growth engines are kicking into gear: port activity spiked in the latter part of 2023, helped by both normalizing U.S. West Coast/U.S. East Coast (USWC/ USEC) market share in the wake of the International Longshore and Warehouse Union agreement and diversions in response to volume restrictions in Panama. While pricing may remain soft during the first part of 2024, Southern California, historically, recovers swiftly because of high structural barriers to new development and a deep, dynamic demand base.

REGIONAL HIGHLIGHTS

United States/Canada

Rents in the U.S./Canada grew by 6% in 2023 after rising a record 30% in 2022. The Southeast and Southwest regions recorded the fastest average growth in rents during the year, including more than 10% in several markets, such as Las Vegas and Central Florida. In the largest coastal gateways, the pace of growth slowed, with a reversal in Southern California and muted growth in New York/New Jersey. Sticky replacement cost rents, boosted by still-high construction costs and increased return requirements, kept a high floor under market rents, even in locations with high levels of new supply.

We expect a near-term rebalancing of supply with demand (a mini-cycle), with the vacancy rate peaking in mid-2024 around 6%—a healthy level relative to the market’s history—before declining again in the second half of 2024, and beyond, as deliveries fall sharply. A reintroduction of scarcity in the market should reaccelerate rent growth.

Europe

In 2023, rents grew by 7%. Performance diverged by location, with markets failing into four groups:

• Supply-constrained markets with healthy growth that benefit from structural trends (e.g., Germany and the Netherlands).
• Markets with traditionally modest growth that continued to grow at a defensive pace (e.g., France).
• High-cost markets where rents stabilized at high levels (e.g., London and Prague).
• Select markets where elevated deliveries drove an increase in concessions (e.g., Poland).

Looking ahead, Europe is likely to see a lower peak in the vacancy rate during the upcoming mini-cycle because new construction starts fell earlier than in the U.S. and other global markets. Improvement in the demand backdrop could cause rent growth to reaccelerate quickly as scarcity returns to many markets on both the Continent and in the United Kingdom.