Ahead of the curve, impact of freight volumes on logistics rents
Changes in freight volumes is an important indicator of future rental growth prospects a year in advance
It is clear that freight volumes within a location or market have a direct impact on demand for logistics space to process those goods and therefore one of the main indicators that form market expectations and impact rental growth.
We look at the relationship of this market dynamic based on the top 50 US logistics markets and assess to what extent changes in freight volumes impact future rental growth. We expand our previous analysis which was based on single period cross-section of logistics rents as of Q4 2022 compared to Q4 2021 to a panel regression that measures rental growth dynamics using data over the past 5 years for all markets. This allows us to capture longer-term cyclical dynamics as well as significantly expands the number of observations to establish the impact of freight volumes on rental growth.
The chart below illustrates this relationship measured as correlation between panel regression based impact of changes in freight volumes at different time periods (lags) and future rental growth across those 50 US markets.
As the chart illustrates, peak correlation (impact) is around a time lag of 4-8 quarters which implies that changes in freight volumes centered around the prior 1-2 years have the highest impact on future observed rental growth. This is as expected as logistics volumes drive logistics activity and demand for space as well as impact other activity metrics.
In terms of the magnitude of impact on future rents the results indicate a near 1-for-1 relationship with the coefficient at around 0.9%, which implies that a 1% increase in volume activity translates to ca 0.9% expected rental growth within this 1-2 year time frame. This is also as expected given there is a level of vacancy to absorb both shorter-term and typical fluctuations. Also the impact becomes highly significant (t-statistic for the coefficient) for this time range which confirms the importance of this economic dynamic on rental growth.
We also split the data into higher vacancy markets and lower vacancy markets, to identify potential differences in impact sensitivity, given as per above, higher vacancy markets would have more capacity to absorb volume fluctuations with potentially lower sensitivity, until a point where natural vacancy is sufficiently low to accelerate marginal demand for space. The average vacancy in our sample during this period is 4.5%, therefore our two clusters are high vacancy market with levels above 4.5% and low vacancy markets with levels below 4.5%. The time profile remains the same for both groups, i.e. the 1-2 year lag in freight volumes is the most significant time period, however the sensitivity for high vacancy markets drops to ca 0.7% and rises to ca 1.2% for low vacancy markets. For both groups, the impact remains highly statistically significant and again confirms expectations of market dynamics.
Of course other factors are important to take into account, however this implies that investors can form well informed views regarding their exposures and investments before freight volume activity translates into market rents and therefore the value of their assets.
Logistics geolocation information
Kania Advisors tracks logistics activity for over 1,000 freight handling locations across Europe and North America and transport traffic on main highways to identify favourable asset level geolocations and aggregate market level dynamics. For information please contact info@kaniaadvisors.com
About Kania Advisors
Kania Advisors is an independent research and advisory firm focused exclusively on institutional real assets allocations and investment programmes. We provide advice and solutions to improve outcomes in real assets investment programmes. We conduct detailed industry research and custom studies typically focused on quantitative analysis and provide insights which form a critical part of a client's decision process.