Fierce demand for warehouses smaller than 120,000 square feet has helped push up rental rates by twice as much than larger warehouse spaces, according to a new report from CBRE that says the hot market for smaller spaces won’t cool any time soon.
Demand from e-commerce and other companies, combined with a “relative dearth” of new construction of smaller warehouses, has increased rents on warehouses smaller than 120,000 square feet by 33.7 percent in the last five years, compared with a 16 percent increase on rents of warehouses larger than 250,000 square feet, the report said.
In addition, smaller spaces are tougher to come by, the report found. Availability rates on space sized between 70,000 square feet and 120,000 square feet fell 3.9 percentage points between 2014 and 2019, to 7.4 percent, according to the real estate company. Availability rates include vacant space as well as space that is being marketed because it will soon be available.
In contrast, the availability rate on warehouses sized between 120,000 square feet and 250,000 square feet fell 3.4 percentage points, to 8.6 percent, and the availability rate on warehouses larger than 250,000 square feet fell 3 percentage points, to 8.9 percent, the report said.
The availability on warehouse space smaller than 70,000 square feet fell by 1 percentage point, to 5.8 percent, and the average availability across the warehouse sector fell by 3.2 percentage points, to 7.5 percent, the report said.
The report sheds new light on the much-discussed dynamic behind the fierce demand for warehouse space, much of it driven by logistics providers seeking space near urban ports and e-commerce companies looking for warehouses near consumers from which they can quickly deliver goods in the last mile.
While a large proportion of the smaller warehouses are in urban areas, the demand is driven as much by the fact that e-commerce and logistics companies are seeking smaller space because that suits their needs, as it is they are seeking space in urban areas and the only space available in such tight neighborhoods is small, said David Egan, global head of industrial and logistics research for CBRE.
“It’s not just about e-commerce,” Egan said, adding that a wide variety of businesses use smaller space. “It a pretty broad type of trend.” And the demand for smaller warehouses is strong in suburban areas, not just in urban areas, he said.
That demand has combined with a “dearth” of new construction of smaller warehouses since 1990, the report said. It found that new construction of warehouse space smaller than 120,000 square feet had increased by an amount equal to only 1 percent of the existing inventory of that size space each year since 1990. But the new construction of warehouse space larger than 250,000 square feet had increased on average by 3 percent of the existing inventory of that size space each year since 1990, the report said.
As a result, rents for spaces smaller than 70,000 square feet rose from $6.03 per square foot to $8.01 from 2014 to 2019, and rents for spaces sized between 70,000 square feet and 120,000 rose from $4.99 per square foot to $6.67, the company said.
Over the same period, rents on space that is between 120,000 square feet and 250,000 square feet increased from $4.64 to $5.72, and rents on space larger than 250,000 square feet rose from $4.09 per square foot to $4.73 per square foot, the report said. The average rent on the entire sector increased from $4.94 per square foot to $6.12, the report said.
“We’ll continue to see strong demand for light industrial facilities as e-commerce grows, which, in turn, means we can expect to see additional strong rent growth for these warehouses,” said Chris Zubel, a senior managing director leading CBRE’s representation of Industrial & Logistics investors in the Americas.