Rents on warehouse lease renewals at nosebleed levels, CBRE says

Those figures don’t include the 3% annual rent escalators 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 term, was $4.19 per square foot. The rent would then rise 3% a year from that level.

An occupier with a 10-year lease expiring this week can expect steeper hikes, CBRE said. In the third quarter of 2011, the average asking rent was $5.32 per square foot, compared with $8.92 per square foot today. The overall vacancy rate was 8.7% compared with a 3.6% vacancy rate today. In addition, annual rent increases were smaller than they are today, CBRE said.

In 2011, the U.S. industrial market was shedding the last vestiges of the Great Recession. More importantly, e-commerce, by far the most important factor in the decadelong warehouse bull market, had not begun to truly take off.

Despite the specter of sizable rent increases, no one expects available logistics warehouse space to go begging. Net absorption, which measures the difference between occupied and vacated space during a given time, is at record highs, indicating sky-high demand. All year long, occupiers and their advisers have been scouring the country to secure hard-to-find warehouse capacity, and are unlikely to care how much it costs when they do.

In addition, warehousing represents only 7% or so of a company’s total logistics costs, while transportation can account for 50% to 70% depending on the scenarios, according to a CBRE report from earlier this year, Many occupiers would be willing to pay dearly for prime warehouse space to put their goods nearer to customers. This would reduce shipping costs and increase delivery speed and reliability.

While the current rate of increases on lease renewals may level off in the years ahead, demand and rents are likely to remain smartly elevated. Today’s consumers are fickle and intolerant of delivery delays, and will shift brands at a moment’s notice if they are dissatisfied. Businesses unwilling to risk losing those buyers will push as much inventory into as many warehouses as possible. More warehouses will dot the American landscape as the decade progresses. In that highly plausible scenario, market conditions will surely favor lessors.

CBRE bases its forecasts on data from triple-net lease agreements, in which a tenant or lessee promises to pay all of the property’s expenses. These include real estate taxes, building insurance, maintenance, rent and utilities. The firm classifies logistics and manufacturing space as industrial property, though logistics makes up the bulk of the category.