Watch Now


Logistics warehouse tenants should brace for 10% rate hikes — CBRE

This year looks even better than last, at least for landlords

A beehive of activity expected to continue, CBRE says (Photo: Jim Allen/FreightWaves)

Big-box logistics warehouse tenants may be facing their most challenging year ever as a mix of strong e-commerce demand, tight supply and rising construction costs could drive up rents by as much as 10%, according to an executive for real estate services giant CBRE Group Inc. (NYSE:CBRE)

John Morris, CBRE’s industrial and logistics and retail leader, said in a webinar on Monday that the chances of double-digit rate hikes would largely depend on the pace of construction activity. The North American big-box industrial market currently has 190 million square feet under construction. However, 43.7% of that space has been pre-leased and is effectively off the market, according to the company.

Because of the limited amount of space that is left to bid on amid elevated demand, the North American market remains in a “state of undersupply,” said James Breeze, CBRE’s global head of industrial and logistics research.

Adding to the pressure on occupiers is the higher cost of building materials as the industrial sector struggles to erect buildings as fast as it can while competing with the surging residential housing market for access to raw materials, in-process and finished goods. Those costs are typically passed on to the end user.

The 2021 outlook, if accurate, will amplify the sticker shock for industrial tenants that have watched rents rise relentlessly over the past eight to nine years as demand for e-commerce fulfillment space outstrips the supply of buildings to handle the growth. So-called taking rents, which represent rents during the first year of new or renewed contracts, rose 7% last year, according to CBRE data. Tenants that signed multiyear leases around the middle of the last decade are facing significant increases as their contracts come up for renewal.

The additional square footage that hit the market in 2020 didn’t make a dent in overall vacancy rates, which CBRE said declined by 60 basis points year-over-year. Many big industrial markets continue to report low-single-digit vacancy rates. In Toronto, where strong fulfillment demand has collided with virtually no new construction, the vacancy rate in 2020 fell to a ridiculously low 0.3%.


In another indicator of the record bull run, so-called cap rates have fallen to record levels in large and midtier markets. Cap rates fall when real estate prices rise. This creates what is known as “cap compression.”

The industrial market is being bid up by financial firms looking to get in on the action, as well as money flowing from other real estate categories like commercial office, which has taken it on the chin during the COVID-19 pandemic as millions of Americans continue to work remotely.

The report, the first of its kind for CBRE, measured big-box activity in the top 22 industrial markets in the U.S. and Canada. Big-box facilities start at 200,000 square feet and rise to well over 1 million square feet. The industrial market, as defined by the company, is a combination of logistics and manufacturing facilities. However, logistics comprises the bulk of the activity. 

The surge in e-commerce traffic due to the pandemic dramatically accelerated the trends in place since around 2012 and 2013 as e-commerce began moving from the fringe of retail into the mainstream. The CBRE panelists said there is little chance the market will reverse itself in 2021, and no one was willing to bet on a levelling off in 2022, either. 

Another factor thrown into the mix in the past year or two is the projected surge in demand for cold storage facilities as more people shop online for refrigerated and frozen foodstuffs, the panel said.

About 350 million square feet was transacted in 2020, a 25% increase over 2019, based on CBRE data. Not surprisingly, e-commerce accounted for the largest percentage with a 27.1% market share. That was followed by third-party logistics providers at 25.8% and the general retail and wholesale segment at 24.7%. 

However, the panel said it wouldn’t be surprised if the 3PL segment becomes the market share leader in 2021. That’s because an increasing number of retailers and e-tailers are outsourcing their warehousing and distribution needs to the third parties, which in turn will spur 3PL demand for more space, they said.

One Comment

Comments are closed.

Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.