This has been dubbed the ‘sticker shock’ for logistics warehouse tenants, but given the extreme tension in industrial real estate and the upward trends in demand seen for the rest of the decade, the prospect of A surge in renewal rates for multi-year warehouse leases should come as no surprise.
That said, the scale of the planned increases, at least those released Monday by CBRE Services (NYSE: CBRE), is impressive. For example, the five-year average rent for renewals in the Philadelphia market is currently $ 7.65 per square foot, according to the report. This is an increase from $ 4.72 per square foot when the lease, signed in 2016, expired in the second quarter of 2021.
In California’s Inland Empire, east of Los Angeles, home to the nation’s largest warehouse complex, average rent asking for renewed leases jumped to $ 10.92 per square foot, from $ 6. $ 75 per square foot when the last five-year term expired in the second quarter. according to CBRE data. Most industrial leases with large occupants have a term of three, five or ten years.
For the 18 major industrial markets studied by CBRE, the smallest cumulative percentage increase in average rent at the five-year expiration date of a lease at current charged rent levels was 29.1%. The nationwide average increase was 25%, according to CBRE data.
Those numbers do not include the 3% annual rent indexation built into industrial contracts, CBRE said. For example, the average rent in the Philadelphia market during the second quarter of 2016, which would coincide with the start of a five-year lease, was $ 4.19 per square foot. The rent would then increase by 3% per year from this level.
An occupant with a 10-year lease expiring this week can expect larger increases, CBRE said. In the third quarter of 2011, the average asking rent was $ 5.32 per square foot, compared to $ 8.92 per square foot today. The overall vacancy rate was 8.7% compared to 3.6% today. Also, the annual rent increases were lower than they are today, CBRE said.
In 2011, the American industrial market was losing the last vestiges of the Great Recession. More importantly, e-commerce, by far the most important factor in the warehouse bull market for a decade, had not started to take off.
Despite the specter of significant rent increases, no one expects the available logistics warehouse space to beg. Net absorption, which measures the difference between space occupied and space vacant over a given period of time, is at all-time highs, indicating skyrocketing demand. Throughout the year, occupiers and their advisers have scoured the country for hard-to-find warehouse capacity, and they’re unlikely to care how much it costs when they do.
Additionally, warehousing represents a small fraction of a company’s supply chain costs, with transportation accounting for the largest share. Many occupants will be willing to pay dearly for top-notch warehouse space to bring their goods closer to customers. This would reduce shipping costs and increase the speed and reliability of delivery.
While the current rate of increase in lease renewals may stabilize in the coming years, demand and rents are expected to remain very high. In an increasingly e-commerce-driven world, downtime and delivery could be the difference between a business’s success or failure. Companies unwilling to take risks will push as much inventory into as many warehouses as possible. Other warehouses will dot the American landscape as the decade progresses. In this highly plausible scenario, market conditions will surely favor donors.
CBRE bases its forecasts on data from triple net rental contracts, in which a tenant or tenant agrees to pay the entire building expenses. These include property taxes, building insurance, maintenance, rent and utilities. The company classifies logistics and manufacturing space as proprietary, although logistics make up the bulk of the category.