Rapidly changing retail, resulting in more e-commerce, is a large reason rental rates are rising. According to a recent report by CBRE, the United States is seeing large growth in increased rental rates for industrial warehouse space, leading to “sticker shock” for many current and potentially future occupants.
“In many cases, those who signed a five-year lease four years ago, and are starting to engage their landlords for the renewal of their contracts, are seeing their rental rates increase 100 percent.” said Daniel De La Paz, executive vice president for CBRE.
Historically, rental rates have increased at a rate of closer to 3 percent, per CBRE’s report.
These increasing rates are attributed to a continued, strong demand for space while delays in new construction have drastically reduced the volume that is readily available. These delays have dropped the nationwide industrial vacancy rate to 3.6 percent in the third quarter, year-over-year, asking rents have grown to 10.4 percent.
Despite this sticker shock, the demand for industrial space is not currently suffering. CBRE’s report details how a rebounding economy, the need to hold more inventory onshore and increased e-commerce sales have led to record leasing of 826 million square feet year-to-date through October. However, rising prices may have some impact on demand into 2022.
“Rents are rising so fast due to demand for warehouse space greatly outweighing supply,” said De La Paz. “That dynamic is driven by above-normal consumer spending on goods brought through [for example,] the ports of Los Angeles and Long Beach, as e-commerce demand has exploded due to COVID [and] given limited new developments due to a scarcity of industrial land.”
According to CBRE, current renters with five-year leases are being subject to higher rates. An occupier with a five-year lease expiring in Central New Jersey will see the biggest average increase in the U.S. at 64 percent, followed by Philadelphia and California’s Inland Empire at 62 percent.
Meanwhile, many California markets dominate five-year rent growth due to low vacancy rates and large population centers. California markets seeing large rental rate increases included Sacramento (52.9 percent), Orange County (46.6 percent), California’s Central Valley (43.6 percent), Oakland (39.4 percent), Walnut Creek (36.6 percent), San Jose (34.2 percent), and Los Angeles (33.3 percent). All of these being well above the national average of 25 percent.
An occupier with a ten-year lease expiring today can expect even steeper rent increases.
According to CBRE’s report, Industrial market conditions favored occupiers in 2011, when asking rents were 67 percent lower than today and carried smaller annual rent escalations. Now, occupiers may face rent increases of between 65 percent and 75 percent compared with the lease they signed in 2011.
With the current market trends in place, rates are expected to continue rising on the West Coast through the new year.
“We’re likely going to hit record cargo processing of 20 million TEUs (twenty-foot equivalent units) this year,” said De La Paz. “Given this unprecedented demand, occupiers are increasingly realizing that the first priority is securing space at almost any price…We anticipate rental rates will continue to appreciate above normal levels for 2022.”
However, even with the large rental increases the west coast is facing currently, De La Paz is optimistic about the future outlook as COVID tensions cease, and supply and demand returns to more normal conditions.
“The long-term outlook should see a normalization over time,” said De La Paz.