Industrial Rents Causing 'Sticker Shock' In These Markets

Industrial rents are expected to continue their steady march upward well into 2022, inducing sticker shock in occupiers of warehouse space in pricey markets like the Northeast and Southern California. 

A new report from CBRE indicates that for many industrial users, double-digit rent increases will be the norm: in central New Jersey, occupiers seeking to renew or move will see rents increasing by 64%, while users in California’s Inland Empire and the city of Philadelphia will experience increases of 62%, respectively.  California also is home to eight markets over the national average, thanks in part to historically low vacancy rates.

To add more context, CBRE researchers indicate that warehouse occupiers who signed five-year leases in 2016 are now facing rents that are an average of 25% higher as they look to renew or move (a tough option, CBRE notes, since vacancy is at a historic low nationally at 3.6%).

The increase is even more pronounced for occupiers with 10-year leases expiring this year: when they signed their deals a decade ago, market conditions favored occupiers. Overall vacancy was 5.1 points higher than it is now (at 8.7%) and asking rents were 67% lower than today, with annual escalations that were much smaller.

An occupier with a 10-year lease expiring today can expect even steeper rent increases. Industrial market conditions favored occupiers in 2011, when the overall vacancy rate stood 5.1 points higher at 8.7%. Asking rents in 2011 were 67% lower than today, with much smaller annual rent escalations. Overall, occupiers may face rent increases of between 65% and 75% compared with the lease they signed in 2011.

“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 & 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.”

Leasing has also hit records this quarter, with 750 million square feet of transactions closed, and some experts are calling the sector the “darling” of net lease. And CBRE analysts say that despite this sticker shock, demand isn’t likely to suffer anytime soon. 

“A rebounding economy, the need to hold more inventory onshore and increased e-commerce sales have led to record leasing of 826 million sq. ft. year-to-date through October,” the report notes. “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.”