In a stark reminder of the unprecedented tightness gripping U.S. logistics warehousing, California’s Inland Empire, the country’s largest and most important warehouse and distribution center, had a vacancy rate of just 0.7% as of the end of the third quarter, according to data published Friday by real estate services firm CBRE Group Inc.
The figure is remarkable given the magnitude of operations at the complex, which feeds goods to large swaths of the country from approximately 720 “big-box” facilities, each one 300,000 square feet or more. Plans to erect more buildings have faced opposition from residents who worry about noise, overcrowding and pollution. The Inland Empire is the umbrella name for a collection of California cities that include Victorville, San Bernardino, Riverside and Ontario, among others. It is 70 to 100 miles from the Port of Los Angeles, depending on the destination.
The Inland Empire is not alone in reporting microscopic vacancy rates. According to CBRE (NYSE: CBRE) data, Los Angeles reported a 1% vacancy rate. Boston and Charleston, South Carolina, clocked in at 1.9%, while central and northern New Jersey reported a 2.4% vacancy rates, according to the data.
The nationwide vacancy rate at the end of the quarter stood at a record 3.2% as demand outstripped new supply by 41 million square feet, CBRE said. The rate is at levels that few people in the industry imagined they’d ever see.
Asking rents in the quarter rose to $8.92 per square foot, the highest figure since CBRE began compiling statistics in 2002. Rents increased 3.1% sequentially and 10.4% year-on-year, according to the data.
Matthew Walaszek, director of research at CBRE, said in an interview Friday that the current crunch shows no signs of abating, and may last as long as it takes to unwind the supply chain situation. With so much attention focused on the congestion at the ports of Los Angeles and Long Beach, it is easy to overlook the impact of the lack of warehouse space on the entire supply chain. In markets that are key to the fluidity of import traffic off the West Coast, there is little room in warehouses to position goods once they clear the docks and move inland. Matthew Walaszek of CBRE said in a Friday interview that the dearth of space at the Inland Empire is a knock-on effect of the year-long supply crunch as U.S. importers raced to get goods into U.S. commerce before they became stuck on the west or east coasts.
Even after the current cycle abates, warehouse space will remain in very high demand as e-commerce fulfillment activity increases and more businesses boost their buffer stock to ensure that goods are available and can be easily delivered. Prologis Inc. (NYSE: PLD), the world’s largest developer and operator of logistics real estate, said it expects the demand tailwind to last through the rest of the decade. CBRE estimates that, by 2032, e-commerce will account for one-third of U.S. retail sales, excluding auto and fuel sales. Today’s ratio stands at about 20%, according to company data. Walaszek declined to provide a long-range forecast, but he doesn’t see demand cooling for years to come.
Developers appeared undeterred in the quarter by higher land, labor and materials costs, as well as materials shortages. Deliveries rose 36.1% to 79.3 million square feet. A record 448.9 million square feet of projects were under construction in the quarter, a sign developers continued to build in spite of escalating costs, CBRE said. Those projects will add warehouse supply to the market and bring some relief to occupiers, said Walaszek. But they will not be delivered all at once. he said. Instead, they will hit the market in staggered intervals over the next 6 to 12 months, and perhaps carry over to 2023, he said.
Net absorption, defined as the amount of occupied space minus vacated space, totaled 120.3 million square feet in the quarter, CBRE said. The figure indicates a “frantic need” to occupy warehouse space regardless of price, according to Walaszek. Through the first nine months, net absorption totaled 291.9 million square feet, 135% more than the same period in 2020, according to the data.
The report covers logistics and manufacturing capacity, though logistics accounts for the bulk of the findings.
(This story has been updated to include comments from Mr. Walaszek)