Many warehouse users will face double-digit rent increases for renewing their leases or moving to new space in the coming months, according to a recent report from CBRE.
Most industrial and logistics leases span five years, some 10, typically with 3 percent annual rent increases. CBRE says that asking rents in the red-hot sector have risen so much in recent years that many warehouse occupiers that signed five-year leases in 2016 now are finding rents an average of 25 percent higher as they need to either extend their leases or move to new space. The latter is a tough option, given that industrial vacancy in the U.S. remains at a historic low of 3.6 percent.
In some areas of the country, the increase is more pronounced. Central New Jersey has the highest increase at 64 percent, followed by California’s Inland Empire and Philadelphia at 62 percent, respectively. California has eight markets over the national average due to its low vacancy.
“Industrial occupiers’ options are more limited at lease expiration, with most faced with paying a significant increase in rent for the same space,” said John Morris, CBRE executive managing director and industrial and logistics leader. “With vacancy so tight, we will continue to see this trend in rents in the near term. Many are willing to pay those higher rates now, because of the critical nature of the space involved. More construction deliveries could help ease the situation in 2022. Some occupiers, particularly retailers, will start to pass these costs along to consumers.”
Despite this sticker shock, demand for industrial space hasn’t suffered yet. A rebounding economy, the need to hold more inventory onshore and increased e-commerce sales have led to record leasing of 826 million square feet year-to-date through October. Indeed, industrial occupancy has become highly strategic given tight market conditions and the growing need to optimize supply chain networks. Nevertheless, rising prices may have some impact on demand over the course of 2022.