Large US warehouse rent rise fails to blunt demand

Large US warehouse rent rise fails to blunt demand

Warehouse space in New Jersey.

Demand from e-commerce is outstripping warehouse supply, forcing rental rates substantially higher in many cites/US metro regions. (Above: Warehouses and facilities in northern New Jersey, just west of Manhattan.) Photo credit: Shutterstock.com.

Rents for warehouse space increased 7.2 percent in the second quarter compared with 2017, but that did not put a damper on demand by importers, exporters, logistics providers, and e-commerce fulfillment retailers, with absorption rising 4.9 percent, according to Cushman & Wakefield’s second-quarter industrial report.

“Healthy demand combined with modest supply growth caused US industrial rents in the second quarter of 2018 to increase 7.2 percent from a year ago, rising in 58 of 79 markets; 18 markets reported double-digit gains,” Cushman & Wakefield stated in its Marketbeat US Industrial Q2 2018 report. The average national asking price in the second quarter was $6.11 per square foot, although rents vary considerably by region: $4.54 in the Midwest, $4.75 in the South, $5.17 in the Northeast, and $9.28 in the West.

Demand was broad-based by region. Nationwide, 64.1 million square feet of industrial space were absorbed in the second quarter. Net absorption totaled 6.87 million square feet in the Northeast, 19.23 million square feet in the Midwest, 26.59 million square feet in the South, and 11.44 million square feet in the West.

2019 outlook

Absorption of warehouse and logistics space is projected to remain buoyant through 2019, although rent growth will gradually decelerate next year as supply modestly outpaces demand. Nevertheless, net absorption in 2018 is projected to exceed 240 million square feet nationwide for the third consecutive year. Net absorption in 2019 is projected to exceed 200 million square feet, the sixth consecutive year that number will be eclipsed, the report stated.

As warehouses and logistics operators become more efficient, increasing rents are not expected to blunt demand for more space, especially near seaports and in large inland hubs where import distribution and e-commerce fulfillment needs are the greatest. Real estate accounts for only about 5 percent of total supply chain costs, according to a Prologis report in April.

The national industrial vacancy rate in the second quarter was 5 percent, unchanged from the first quarter, but well below the five-year historical average of 6.8 percent, Cushman & Wakefield reported. Vacancy rates have declined steadily from 8 percent in 2014.

Seaport-dependent industrial hubs continue to be the tightest industrial real estate locations in the United States. The second-quarter vacancy rate was 1.5 percent in Los Angeles, 2.6 percent in Central New Jersey, 0.6 percent in Savannah, 3.9 percent in Hampton Roads, Virginia, and 3.9 percent in Seattle. By contrast, some major inland hubs exceeded the average national vacancy rate, with Atlanta at 8.2 percent, Chicago at 6.3 percent, and Dallas-Fort Worth at 6.4 percent.

Developers are responding to the tight market conditions by ramping up construction of new warehouses and distribution centers, with much of the building occuring on speculation. Construction starts in the second quarter increased 8.1 percent from the first quarter. Currently there are 267.2 million square feet of industrial space under construction, of which 178.3 million square feet are on spec. That is 70 percent higher than the five-year historical average of 104.9 million square feet, the report stated.

E-commerce fulfillment centers propelling real estate demand

The steady growth of online shopping has created strong demand for e-commerce fulfillment space in urban locations. Since options in many large cities tend to be confined to older, smaller properties, the sub-250,000 square-foot sector is experiencing a second life. “Space options remain particularly tight in the 100,000-to-250,000 square-foot size segment where new supply has lagged and leasing demand has popped,” the report stated.

Ben Conwell, senior managing director and eCommerce Advisory Group leader, told a Cushman & Wakefield webinar Wednesday that Amazon started e-commerce fulfillment by establishing large facilities outside of the urban cores. “Today we see a consistent push to locate smaller logistics assets deeper into urban areas,” he said. The push includes older facilities that are adapted for e-commerce fulfillment, as well as construction of “cutting-edge” facilities.

Nevertheless, online shopping has become so pervasive throughout the United States, with much of the merchandise sourced overseas, that e-commerce fulfillment is also driving demand for facilities larger than 250,000 square feet located outside of the urban cores said Garrick Brown, vice president and head of retail research, Americas, at Cushman & Wakefield.

As logistics facilities become more automated, and real estate more costly, developers are constructing warehouses with higher ceilings in order to accommodate the higher stacking of merchandise and the retrieval of the products with the use of robotics. This trend is intended to achieve greater land-use efficiencies amid higher land costs. Users of industrial properties today are measuring the utility of a facility in terms of its cubic capacity rather than its square footage, Conwell said.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.

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