Momentum slows from record levels

Signs in the third quarter that logistics occupiers were starting to adopt a more cautious approach amid economic headwinds became more evident in the fourth quarter as demand slowed from Q4 2021 levels in all three regions. However, market fundamentals are still strong, with low vacancy rates and healthy rental growth. Demand is likely to continue to moderate as headwinds weigh further on the sector.

In the U.S. there was a record-breaking level of deliveries in 2022, but vacancy remains low at just 3.4% and asking rents jumped a hefty 19.1% year-over-year. In Europe, severe supply constraints are helping to support the market with the aggregate vacancy rate sitting below 4% and producing rental growth of 15.9% year-over-year. Demand in Q4 was the most resilient in Asia Pacific as 3PLs bolstered activity and positive rental growth in most markets. However, supply levels across the region are elevated, with many projects that were delayed due to Covid-related measures completing in Q4. 

Future trends: Supply-demand imbalance to continue

Outlook for 2023: The slowdown in leasing will continue this year, though levels should remain above the 5-year average. Occupiers continue to be wary and are looking to maintain buffer stock to protect inventories. Latent demand exists, but a lack of suitable space in some markets is holding back leasing activity. Markets with available, energy-efficient space should experience higher leasing activity heading into 2024, when consumption levels are expected to recover.

Long-term: The supply-demand imbalance will continue over the coming years despite elevated short-term completions. In many major urban markets, land banks are at historical lows with less land being allocated to logistics use. While demand is being diverted to secondary and tertiary markets with ample developable land, higher financing costs are likely to dampen construction activity. There are no indications that supply constraints will ease over the medium term.