Industrial Tenants Face Sticker Shock Amid Spiraling Inflation

Renters of industrial properties are facing sticker shock in the current inflationary environment, with national effective rent growth expected to increase nearly 23% year over year in 2022. 

“Although industrial has a reputation for shorter lease terms, the reality is that the weighted average lease term for industrial is around five to seven years, much like it is for office,” write Cushman & Wakefield economists Rebecca Rockey and James Bohnaker in a new analysis. “Many of the leases that are rolling today are therefore significantly underpriced on the tenant side, especially with escalations that may have been negotiated five to seven years ago.” 

And depending on the escalations occupiers have incurred, Rockey and Bohnaker say the market value of rent payments could be underpriced by anywhere from 85% to 134% when leases roll.

“In many markets, particularly those that have development constraints due to physical land features, land scarcity or zoning laws, rent pressure will be much more significant than the national average,” they say. “Any expectation that these rent pressures fundamentally shift is misplaced…The probability that rents decline, let alone decline by enough for costs to stay flat, is extremely low. Not every industrial-logistics occupier has a lease rolling this year or next, but eventually all occupiers who rent real estate will face these conditions.”

So what’s an industrial occupier to do/? Cushman & Wakefield data shows that in two-thirds of major industrial markets they cover, tenants are renegotiating leases earlier than they historically otherwise would have. And “in 55% and 33% of markets respectively, occupiers are looking at new submarkets at similar or longer distances than in the past, perhaps indicating awareness that today’s energy and transport cost issues are episodic but real estate costs are lasting,” the economists say. 

Another 30% of markets report that tenants are exploring build-to-suit options to better control costs, while 20% of markets say technology and automation are “increasingly part of the calculus. “

 “It’s important to remember in addition to facing an incredibly tight current labor market, occupiers need to prepare for the loss of a significant segment of the current workforce as one-fifth of logistics workers will reach retirement age this decade,” the analysis notes. “Leveraging robots, autonomous vehicles, blockchain technologies and more will help occupiers become nimbler in their supply chains, which will help lower variable expenses and mitigate risks in the long run.”

The warehouse automation market is expected to grow by 1.5 times by 2025 to $37.6 billion, according to Newmark.