Are Industrial Lease Terms Getting Longer?

Industrial lease terms are getting longer as a result of a tight industrial supply and rapidly rising rents. In Orange County, industrial rents increased 10.4% in 2017; in Los Angeles, rents bumped up 7.9%; and the Inland Empire saw 20% increases in rents in the last year, according to research from NAI Capital. As a result, tenants are signing longer-term leases—for as much as 10 years. Ecommerce users are also starting to invest heavily into warehouse spaces to create an efficient and functional setting, and they want to stay in the space as long as possible.

“We are seeing longer-term leases,” Tom Bak, a senior managing director at Trammell Crow Co. in the firm’s Orange County office, which recently completed a trio of development projects in the Inland Empire, tells GlobeSt.com about leasing trends. “A lot of the ecommerce tenants have longer-term objectives and they are investing a tremendous amount of money in their material handling. They are signing leases in the five to 10 year basis where years ago, you would see more three to five year leases.”

One reason for these longer lease terms is heightened demand, which has created a limited supply of quality product for ecommerce users. “Demand is the best that I have seen in my 30-year career,” says Bak. “It is not just a function of the economy benefitting all businesses, but the merger of ecommerce with manufacturing and industrial has really been a game changer. It super charges the demand. We have seen tremendous demand statistics and net absorption has been outstanding.”

In addition to the strong demand for product, ecommerce users are also investing more capital into their space build-outs, and many of these users are looking to retain that investment. “It is a combination of their desire to reduce the roll over of leases,” says Bak. “Ecommerce companies are putting tremendous amounts of money of their own into the interior handling systems, and they want to sign long term leases as a result of that investment.”

The longer lease terms are great for landlords, who are locking in record-high pricing today. As a result, many of them are not giving up their product. Trammell Crow is a long-term holder, and admits that it is difficult for investors to find deals. “We joint venture on a long-term hold basis,” Bak. “The majority of the big boxes are institutionally owned, and they have such a strong appetite to have investments in the Inland Empire that the last thing that they want to do is sell it. While assets are sold, there is a disproportionate share of properties that are held on a long-term basis.”