Surging E-Commerce Will Spur Industrial Rents to Grow 15%

The surging demand for e-commerce sales is not expected to abate anytime soon—and that will force occupiers to look for new development options. 

A new analysis from Cushman & Wakefield predicts that market conditions will remain at historically tight levels, pushing warehouse occupiers and e-commerce tenants to alternative options as premium taking rents rise. Cushman predicts that rent growth for warehouse and logistics space will grow by more than 15% over the next two years; Class A and new construction rents are forecast to jump by even more.

“As consumers become more accustomed to purchasing online, their expectations with regards to delivery service and speed mount,” write Cushman’s Carolyn Salzer and Jason Price. “Transportation costs account for nearly 65% of total logistics costs, making it the focus of any strategy aiming to reduce supply chain costs. Inefficiencies converge around transportation, especially in dense urban areas. For e-commerce occupiers, reducing the delivery distance to 30 minutes or less is critical.”

Digital sales grew by 14.6% during the pandemic and translated to nearly $871 billion spent online.  To accommodate that demand, a record 97.5 million square feet were leased by e-commerce occupiers in 2020, while another 77.1 msf was leased last year. E-commerce fulfillment is also more space-intensive than traditional warehousing, the pair note, so the long-term structural growth of logistics CRE has grown as well.  “It is now safe to say that the online shopping trends brought on by the pandemic are the new normal, and many retail categories have plenty of runway left to go,” say Salzer and Price. “Supply chain investments made due to the ongoing pandemic such as technology, automation and strategic site selection, are likely to support increased digital sales in the future. This is especially true for segments that had low e-commerce penetration prior to the pandemic that had also recorded significant increases in online market share, such as the grocery and home improvement categories.” 

Cushman & Wakefield predicts total industrial demand to remain robust, with roughly 800-850 msf of space absorbed from 2022-2023. Of that total, e-commerce occupiers will account for between 35-40% of this demand.

“As market conditions are anticipated to remain at historically tight levels, despite the plethora of new supply expected to deliver in 2022 and 2023, e-commerce and other top occupiers of warehouse space will be pushed to focus on new development options, which boast premium taking rents,” the report notes. “Rent growth for warehouse and logistics space should rise by more than 15% over the next two years with Class A and new construction rents expected to grow at an even higher rate.”

Cushman predicts vacancy will still remain low this year, in the 4.2% range, and say construction bottlenecks may put completions this year and next at “minimal risk” of delays. If a quarter of new supply shows delays by three or six months, the decrease in new supply through 2023 would amount to 3.1% or 6.3%, respectively. Vacancy would post a more constrained projected uptick, ranging from -6 to -32 basis points by the fourth quarter of 2023.