Industrial Landlords, Tenants 'Jousting' Over Asking Rents vs. Taking Rents

Accelerated rent growth nationwide in the industrial real estate sector might not be so much tied to inflation, but rather vacancy rates, according to a new report from Cushman & Wakefield.

The current vacancy rate in comparison to the industrial construction pipeline as of Q2 2022 showed that there was almost 700 million square feet (msf) of space under construction with just under 26% of that space pre-leased, “leaving well over 500 msf of product currently without tenant commitments to be delivered over the next couple of years,” according to the report.

Cushman & Wakefield said that based on preleasing rates, “even if all speculative products were to hit the market immediately as vacant, the national vacancy rate would only tick up by 320 bps to 6.3%.”

Unexpected Outcomes for Occupiers

When examining rents, Cushman & Wakefield said the differences between asking rents (defined as the annual cost per square foot offered by the landlord or sub-landlord for leasing space) and taking rents (defined as the agreed upon rent to be paid at the start of the lease signed between the occupant and the landlord) and trends in those rents can cause unexpected outcomes for occupiers.

These factor importantly into investors’ returns. They’ve also created quite a bit of “jousting” between landlords and tenants for new leases and renewals, according to Craig Tomlinson, senior director & partner of Stan Johnson Company in Tulsa, Okla.

“Right now, the landlords have a clear upper hand, and owners of existing space are currently more lucky than good,” Tomlinson tells GlobeSt.com.

Developers Can’t Confidently Forecast Their Exit

“Build-to-suit and even spec developers are being forced to quote rental rates well above local market ‘ask,’ and prospective tenants are saying ‘yes,’ only to have the developer withdraw because they can’t confidently forecast their exit,” Tomlinson said.

“Developers dependent on fund-style equity have curtailed all projects they can; their sponsors are spooked and don’t want to place foolish bets late in the cycle.”

Tomlinson said that there “is really no economic factor even being seriously discussed that would cause rent rates to ease, borrowing costs to decline, or exit cap rates to retreat.

“Market-rate renewal provisions – the bane of most net leases – are now being insisted on by owners, with CPI floors as a compromise position.”

Asking and Taking Rents Mostly Increasing for Warehouses

Cushman & Wakefield said that on a national level, from 2010 to 2021, there has been a consistent trend of both asking and taking rents for warehouse/distribution space mostly increasing.

“And while both see periods of deceleration, asking and taking rent decreases tend to occur at different times,” the company said.

“Asking rents can remain sticky because owners are still listing at ‘hopeful rates’ vs. ‘taking rents,’ which adjust quicker to real market conditions. Or asking rents may stay elevated slightly longer even as the market slows because owners aren’t willing to drop the asking price, but they are willing to offer more concessions which are captured in taking rent.”

Cushman & Wakefield says that the divergence between the rates has begun to grow. Both average net asking rents and average net lease rates have grown, but the growth rate in taking rents has exceeded that of asking rents, especially in 2021. The difference between net taking rates and net asking rates was 28.2% at year-end 2021, up from a 12.8% spread in 2011.