The need for corporates to restructure supply chain networks towards new omni-channel distribution models continues to support relatively resilient corporate demand for logistics. Falling vacancy and new supply are still pushing rents upwards in the U.S., while demand has carried on outstripping supply in Europe, which saw another quarter of above-average occupier activity in Q2 2016. In Asia Pacific, third-party logistics providers and e-commerce retailers are selectively boosting demand with stronger-than-expected occupier activity in Tokyo.
The pipeline of new industrial construction in the United States expanded by 7.3% on the previous quarter, with speculative completions also increasing in Q2 2016, up by 13.4% quarter-over-quarter – but 36% of this new space was pre-leased before delivery (up from prior quarters). Despite the rise in new speculative completions, robust net absorption levels and higher pre-leasing rates have helped keep the U.S. vacancy rate stable, with the overall vacancy rate falling by 20 bps to 6.0% in Q2. As tenants look to remain in close proximity to the city cores, redevelopments and conversions of older industrial product are also expected to increase.
Moving forward, we will be watching to see if development maintains its current pace. Through the remainder of the year, if tenant demand remains fairly stable across most markets, landlords will continue to enjoy a steady pipeline of leasing activity. Falling vacancy and an increase in new supply will keep pushing rents upwards as we move into the second half of 2016.
European logistics markets witnessed another quarter of above-average occupier activity in Q2 2016, partly driven by companies shifting their networks towards new omni-channel distribution models. JLL maintains a positive outlook for total 2016 take-up, although the UK’s vote in favour of Brexit has heightened uncertainty in one of Europe’s largest occupier markets for logistics. However, the need for corporates to restructure supply chain networks in order to remain competitive persists and should make occupier demand for logistics space relatively resilient.
Development activity continued to be fairly stable over the quarter with new warehousing space under construction still significantly above the five-year average. Nevertheless, available supply continues to edge down as new construction remains heavily driven by Build-to-Suit (BTS) developments. We expect the European average vacancy rate to drop to a cyclical low of around 6% by the end of the year, with vacant space covering just 10-months of occupier demand based on 2015 take-up. Combined with rising land scarcity (in particular for larger units), growing resistance to grant planning permission for large-scale warehouses and higher land prices for units close to cities, the risk of a looming supply shortage is more pronounced.
We maintain our projections of a further hardening in rental conditions over the course of the year as most markets are now firmly landlord-favourable. However, the overall rental growth potential will remain limited, partly due to competitive rents available in the BTS market.
Logistics demand in Q2 2106 continued to be supported by third-party logistics providers and e-commerce firms in Asia Pacific. Existing tenants in Hong Kong became more conservative during lease renewals amid weakness in external trade. Stronger-than-expected demand from third-party logistics companies and e-retailers was witnessed in Tokyo, while pre-commitments for logistics space were moderately healthy in Singapore, although overall trade and export figures remained weak. Occupier take-up in Q2 was fairly subdued overall in Australia, particularly outside of the Sydney and Melbourne markets.
Rents were muted across the Asia Pacific region in the second quarter, with rental growth slowing in Shanghai and Tokyo as new completions commanded lower-than-average rents. Rents remained largely flat in Hong Kong with the ongoing weakness in external trade capping growth. In Australia, rental growth was generally passive owing to competition for pre-lease deals in most markets and elevated vacancy in select submarkets.
Source: JLL, August 2016
Published August 2016
Adapting to the new age of the megaship
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