U.S. Logistics Property Rents Drop 7%, First Decline in 15 Years
For the first time in 15 years, rent growth for logistics properties turned negative in 2024, slipping by 7% in the U.S. and Canada, according to a new report from Prologis.
The decline of the two North American regions was steeper than the 5% drop experienced globally and the 1% dip seen in Europe. Even so, market rents in the U.S. ended up 59% higher in 2024 than they were in 2019, meaning that logistics leases are still likely to see a significant increase in 2025.
One reason for the slower rate of growth of net effective rents was excess supply in specific markets like Phoenix as lease-up times lengthened, Prologis said. “Concessions, such as free rent, trended back toward prepandemic norms in the U.S. and Europe.” Globally, the only two U.S. markets where rents grew were Nashville and Houston.
New construction also slowed because of the 15% gap between market rents and replacement cost rents in the U.S.
American logistics space vacancy rose 130 bps to 7.1% in 4Q 2024, well above the 4.8% recorded in Europe.
Net absorption plummeted 30% in the U.S. with economic uncertainty a big factor. “Delayed decisions, consolidation efforts, limited capital access and ongoing supply chain uncertainties suppressed absorption rates as users leveraged existing capacity, moderating rent growth,” the report stated. Unpredictability caused by changing consumer preferences and shifting trade policies added to the confusion. However, Prologis forecast that leasing would improve in 2025 as excess space was absorbed and consumption stabilized, “driven by rollover demand from 2024 and structural supply chain needs.”
The report also found that many tenants have been attracted to newer, high-quality properties with higher rents. Demand for Class A properties rose, propping up rents. Class B and C properties were forced to lower them – a trend made worse as more residents moved out of less functional buildings. “In the U.S., annual rent growth in the newest buildings outperformed older buildings by approximately 100 bps,” the report stated. “Customers seeking cost reductions consolidated into larger modern facilities, often located farther from end-users.” As a result, many landlords were forced to make concessions. “Globally, concessions were responsible for roughly half of market rent movements,” the report stated.
On a more positive note, it said the risk of oversupply has largely passed after a surge of deliveries in 2023 and early 2024, especially in markets like Phoenix. The slowdown was caused by falling rents, restricted access to capital, higher construction costs and difficulty accessing critical infrastructure. As supply dries up, the gap between market rents and replacement costs will narrow.
In 2024, the market saw replacement cost rents grow, while market rents fell, to the point where market rents are 15% below replacement cost rents in the U.S. There was higher leasing activity in Southern California but rents continued to slide. The report predicted markets outside Southern California would outperform once more in 2025.
For the future, the report expected that constrained supply, high replacement cost rents and Class A demand would encourage eventual recovery in market rents in 2025 with stronger gains in 2026.
Source: GlobeSt/ALM