Southern California Logistics Real Estate: Rents Softened in 2024

The logistics real estate market in Southern California experienced a decline in rents in 2024, marking the first time since the 2007-2009 global financial crisis that annual market rents fell. According to a Tuesday report from warehouse operator Prologis, global rents were off 5% in 2024, with the U.S. and Canada seeing a 7% drop and Europe experiencing a more modest 1% dip. The biggest deterioration was seen in Southern California, where rents were off more than 20% last year.

The decline in rents can be attributed to several factors, including cautious decision-making ahead of the U.S. presidential election and higher interest rates, which acted as headwinds to leasing activity. Additionally, the end of COVID-based buying led to a decrease in demand for logistics space, as consumers returned to more normal purchasing habits. The increased vacancy rates, coupled with positive but subdued demand rooted in economic, financial market, and supply chain uncertainty, pushed vacancy rates up in most markets across the globe.

Despite the down year, market rents are 59% higher in the U.S. and 33% higher in Europe than they were at the end of 2019. Houston, San Antonio, and Nashville, Tennessee, were the top U.S. markets for rent growth last year, while newly constructed facilities had rents 100 basis points higher than older properties. New construction starts fell 33%, and new property deliveries were down 29% last year, with market rents remaining 15% below replacement cost rents, which could drive prices higher this year.

Logistics property vacancies were 7.1% in the U.S. in the fourth quarter and 4.8% in Europe. Vacancies are forecast to fall this year as project completions drop again by 38%. Net absorption – leased space less the amount of space vacated – was 13% below pre-pandemic levels around the globe in 2024, down 30% in the U.S. However, multiyear leases renewing this year will still see a significant increase in most locations as those rents catch up with the sharp jump in rents over the past few years.

Improved economic growth, the need to navigate a shifting trade environment, on/nearshoring, and the need to secure bulk space amid fewer availabilities could drive leasing activity in 2025. Demand for newer properties, high replacement cost rents, and limited supply are expected to produce a moderate recovery in market rents in 2025 and stronger gains in 2026.