London warehouse rents highest in world

By Liza Helps Property Editor, Logistics Matters

ACCORDING TO the research London total prime warehousing property costs top $42 per ft2 for prime space (comprising of rents, taxes and service charges). Vacancy rates here have ticked up but remain below pre-Covid levels as occupiers seek modern units for operational efficiencies and to fulfil ESG criteria.

Total prime warehousing property costs, comprising rents, service charges and taxes, grew by 10.1% in the 12 months to June 2023 across the 52 global markets that Savills monitors. Rental growth continues to outstrip inflation; prime rents alone were up by 11.8% over the same period.

Like London, Sydney faces land constraints and vacancy rates are exceptionally low, under 1%. As a result, costs have increased by 25.4% in the 12 months to June 2023, pushing it to second position for prime warehousing costs globally, at $27 per square foot.

Los Angeles ranks third. In the US, rental growth is moderating as vacancy rates rise from their historic lows, driven by new construction, but are still below pre-Covid levels in most markets. Savills North America Head of Industrial Research Mark Russo said: “Fundamentals in the US remain solid; ecommerce growth is rising and construction spending by the manufacturing industry is up 76% year on year, driven by the semi-conductor, electric vehicle and clean energy sectors.”

Other notable movers and shakers include Rotterdam, up 8 places to 22nd as costs rose 21.1% in a highly supply constrained market that has seen demand increase as nearshoring benefits Europe’s biggest port. In Germany, which benefits from a strong manufacturing base, Hamburg has moved up 9 places to 19th, and Dusseldorf has risen 7 places to 25th following cost increases of 22.3% and 17.6% respectively.

For a warehouse occupier, rents are only a portion of the cost picture. Labour costs are the largest component of operational costs, and tight labour markets have continued to drive them up. Warehouse worker wage costs rose by 7.4% in the 12 months to June 2023 across the 52 markets examined, though the rate of this increase slowed in the first half of this year in line with slowing inflation pressures more broadly.

Electricity and diesel costs (for the running of buildings and vehicle fleets) are also a major factor in warehousing operations, and these are diverging. Diesel costs are falling, but electricity costs continue to rise.

While the rate of increases may be slowing, higher costs are here to stay. That only increases occupier emphasis on the best located, most efficient warehousing space, underpinning future demand for prime warehouses and in turn future rental growth. Looking ahead, Head of EMEA Industrial and Logistics Research Kevin Mofid, said: “The key structural driver of increased online retail remains in place, and demand from manufacturing-related occupiers will continue to rise as companies look to de-risk their supply chains.”

Policy to encourage domestic manufacturing will be another driver of growth. Europe’s share of semiconductor production will need to more than double to reach the EU Chips Acts targets, for example. If successful, that would equate to up to 116.3 million ft2 of additional logistics demand by 2030.

In the longer term, population growth will fuel demand for goods and services, and in turn warehouse requirements, not only in developing economies where populations are rising fastest, but in the growth hotspots of developed ones. Drawing on research in the UK, Mofid added: “Each new household requires 69 ft2 of warehouse space, which means that an additional 224 million ft2 of space will be needed by 2033 to meet the needs of the growing UK population alone.”