Warehouse rents are rising at rates similar to the last few years. E-commerce is the biggest contributor to today’s tight industrial real estate market, according to research from real estate management company Jones Lang LaSalle. Thanks to healthy consumer spending and growing e-commerce sales, the combined logistics and distribution and third-party logistics sectors are responsible for 24% or 21.8 million square feet of total leasing activity.
As space becomes increasingly unavailable, rents go up. The key difference for this year’s market being record-low vacancies, which will lead to an increase in rents, a steady supply of new distribution spaces, and new warehouses. Simply put, there will still be an insufficient amount of spaces to meet the growing demand.
Experts state that nothing has changed for the upcoming year. It’s a great time to be a developer for industrial real estate because the demand continues to increase, the prices for rent continue to go up, and the regular shortage continues to fuel both.
Rates Rising on Top of Freight Growth
Businesses who use industrial space right now are looking not just for the right location but for additional space, and they need to be prepared now more than ever to potentially pay more money than they originally anticipated. The right building with the perfect location to serve the needs of a supply chain will cost more than it has in recent years because the demand far outweighs the available viable options. Renters are certainly going to be unhappy about this, but with no other options, this is inevitable.
Today, labor costs are increasing alongside costs for trucking and rail shipments, which has increased at a rate faster than current rental rates. This means that properly managing transportation costs are going to be key when it comes to choosing the proper location for distribution and warehouse spaces. For every dollar that shippers spend on rent cargo, interest is going to pay 10 times the amount for transportation and seven times that amount for labor. Meaning that managing transportation costs will be critical. The main method people is using today to manage transportation costs is finding proper locations that best support logistics space. Having a space that is closer to distribution hubs or nearby critical transportation networks can reduce the cost that is paid for both, which will help make the most of every dollar spent on rent.
Warehouse Space Shortage
There exists a serious warehouse space shortage, and because of that, people are looking for the perfect space, regardless of cost, thus choosing to tighten belts elsewhere. The third quarter performance of 2018 was overwhelming, and the industrial and logistics indicators were incredibly high-performing. This includes primary and secondary markets. Overall availability rate went down 10 points, by 7.1%. This was the lowest level since the fourth quarter in 2000. This has marked the 34th consecutive quarter that has shown positive net absorption. Overall, this is the longest streak the industry has seen since 2001. Such a national improvement is sure to come with increased costs. The current national vacancy rate has hovered around 4.3% which is the lowest level it has been since 2002. Seaport cities and key transportation hubs have seen even lower vacancy rates. Vacancy rates in Southern California, for example, have hovered around zero. The net rent amount in such areas has increased by 1.7% and is now upwards of $7.21 per square foot, which is the highest amount we have seen since 1989. In fact, since the year 2012, the rent for such industrial spaces has increased 5.6% on an annual basis. In spite of very good conditions, it doesn’t seem as though the industrial real estate market is headed for a bubble simply because demand continues to remain just as steady as supply, if not stronger. Nonetheless, rent is increasing and it’s increasing at such a high rate that one would think that businesses would walk away from different industrial spaces because of ridiculously high prices far exceeding logic. It seems to be, however, that the expected reaction isn’t the case. Decision makers are actively deciding that paying the right premium might be the best choice for their companies. Right now the management of transportation costs remains the most important factor. Shippers and logistics providers know that improvements in alternative fuels, technology, and automation can reduce transportation costs over the next five to ten years. Every 1% that is saved in labor and transportation costs equates to approximately 20% of logistics real estate rent.
Warehouse Sizes Vary
Right now building sizes can run anywhere from 100,000 square feet to upwards of 500,000 square feet. Logistics facilities designed to handle high volumes of shipments while simultaneously providing convenient access to necessary infrastructure are simply unable to provide the spaces that are required in some of the major ports and cities. To that end, secondary markets are starting to experience the largest decrease in availability because people are utilizing secondary markets like Albuquerque, New Mexico as well as Sacramento, California, and even Pittsburgh, Pennsylvania.
The current trade war between China and the United States is exposing the issues with warehouse availability and distribution markets. Retailers front-loaded for the holiday season in order to beat the tariffs. As a result, warehouses were still holding Christmas items when Spring shipments began to arrive. The amount of space available of all sizes is at a historical low. There is construction to reduce this strain, but not enough.
Predictions for Shippers
The amount of logistics space available isn’t going to get drastically larger anytime soon. Shippers and logistics professionals alike are going to have to pay very high rent for the upcoming year, the same as they have in all previous years. It is important to budget for long-term decreases in logistics, transportation, and labor costs while simultaneously preparing more money for increased rental costs. The trade situation will work itself out, but even with issues between China and the United States leveling out, the issue of high rent and subsequent lack of available industrial space will continue.