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Last mile delivery race fuels further demand in logistics markets

Global Market Perspective, November 2019

Global logistics markets continue to be driven by structural changes, as businesses reset supply chains to shift towards omni-channel distribution models and upgrade to more efficient space. E-commerce firms and traditional retailers are also participating in a delivery arms race to get their products to consumers as quickly as possible, putting increased focus on urban logistics and last mile delivery. This is translating into new demand which is helping to hold vacancy rates near record lows despite higher levels of new completions.

U.S. industrial fundamentals remain firm despite new construction

The U.S. industrial market continued its solid performance in the third quarter with the national vacancy rate declining to 4.9% despite the highest level of completions in three years. Strong demand, driven by a preleasing rate of 50%, has helped net absorption keep pace with new supply growth. Rental growth accelerated during the quarter, pushing national asking rents above $6 per square foot, up from roughly $5.75 last quarter. The market should finish 2019 on a high note, but with new supply pulling ahead of net absorption the market is expected to turn more tenant-favourable over time. Coastal and densely-populated markets are likely to garner most of the rent growth, with tenants needing to meet increasingly demanding consumer-delivery expectations.

Demand remains healthy in Europe despite strengthening global headwinds

Overall occupational demand for warehouse space across Europe has remained healthy so far in 2019, albeit take-up has been slightly lower than last year. Occupier demand continues to be driven by structural changes in supply chains, particularly e-commerce, and businesses upgrading to more efficient space. Nevertheless, as we enter the final phase of the year there are signs that businesses are becoming more cautious, reflecting a range of factors including global trade wars, Brexit and weaker economic growth across the Western European economies.

Most development activity remains built to suit, with speculative construction continuing to hover at just below 30% of total space under construction. The European aggregate vacancy rate is currently around 5%, contributing to an acceleration in annual prime headline rental growth to 2.6%, one of the largest increases of the past decade.

Demand positive but slowing in most Asia Pacific markets

In Asia Pacific, leasing demand is still broadly positive but slowing from previous levels, contributing to lower rental growth. While trade tensions between China and the U.S. are impacting market sentiment this has yet to materially impact leasing activity, while 3PL firms and e-commerce retailers contributed to strong demand in Tokyo. Most major markets including Beijing, Shanghai and Tokyo saw rental growth during the quarter.