Warehouse Tenants Face Price Shock as US Industrial Rents Soar

 By Randyl Drummer CoStar News

Warehouse tenants are bracing for the kind of sticker shock already familiar to shoppers buying everything from ribeye steaks to used cars.

Logistics tenants that signed five-year leases with standard 3% annual rent increases in 2016 are at the end of their terms and are facing a situation in which they must renew or move at a time when rents are on average 25% higher across the country than they were a half-decade ago. Research also shows steep increases in rents.

The rent increases are significantly more pronounced in some coastal markets, ranging from 50% to 64% higher than five years ago in Southern California's Inland Empire, Philadelphia and Central Jersey. It said the highest increases were in Central Jersey, where rents were on average 64% higher in that time.

In all, eight California markets are experiencing rent increases above the national average. Rents are up significantly over the past five years in industrial markets in the Inland Empire, with a 61.7% increase, as well as Sacramento's 52.9%, Orange County's 46.6%, the Central Valley's 43.6%, Oakland's 39.4%, Walnut Creek's 36.6% and greater Los Angeles' 33%.

That data is roughly in line with findings by CoStar research, which tracked rent increases of 52.7% over the past five years in the Inland Empire, including a year-over-year gain of 11.3% this year. Industrial rents rose 7.2% in 2020, the first year of the pandemic.

The increases come as the construction of new warehouse and logistics space has failed to keep pace with demand during the pandemic, sending vacancy rates to all-time lows. In the Inland Empire, which has an industrial base of 700 million square feet, landlords have reacted by increasing asking rents nearly 16% in the third quarter from the same point in 2020. New space is either preleased or occupied within a few weeks of being finished, the brokerage reported.

"The bottom line is that rents have doubled within the last 18 months. With construction not keeping up with demand, tenants are realizing that their first priority is securing space at almost any price."

Demand Drives Prices

The increase in demand comes as logjams in global supply chains have slowed delivery of a range of products, from microchips used in automobiles to the steel used to construct warehouses. As a result, consumer prices have been on the rise, with used car prices climbing 40% since the early days of the pandemic in March 2020 and the price of steak rising 25% over the past year.

A lack of available buildings is affecting even the world's largest warehouse landlord and developer. Thomas Olinger, chief financial officer for San Francisco-based Prologis, recently said the firm's buildings are “effectively sold out” as businesses race to lease a diminishing supply of warehouse space during a global supply chain bottleneck.

Tenants that once began renewal negotiations six months before their leases were to expire are now starting talks up to two years in advance for some large buildings in the Inland Empire.

"We're seeing our tenant clients or others in the market get out in front of lease decisions far earlier than they used to in order to navigate the challenges of limited supply of existing and new buildings," who has represented such industrial occupiers as Millennium Distribution and Smart Turn Logistics.

"With the exorbitant rent growth we're seeing, landlords don't want to commit to an agreed-upon rent too early, because they're concerned they may leave income on the table."

"Owners and tenants are finding that the market blows by them as soon as they sign a lease. The owner feels regretful and the tenant feels lucky to have made the deal, even though they thought they were paying through the nose."

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