Industrial Development Costs High, But Rents Make It Worth The Price
Construction costs for industrial development are high, but that isn't putting a damper on the pace of growth thanks to strong warehouse and distribution center demand and the limited supply of modern logistics facilities, CBRE reports.
The fastest-rising cost component for industrial projects isn't labor, but land, which can represent more than half of a project's total construction costs. Depending on the market and other factors, costs these days range from $45/SF to $170/SF.
Even at that range, CBRE said pro forma market rents are more than necessary for developers to break ground, including on spec properties. Currently the spread between pro forma and break-even rents is from 20% to 40%, which makes industrial development a profitable proposition in all of the nation's 10 largest markets.
Developers are taking the opportunity. In Chicago, for instance, the largest spec industrial development in more than a century is underway. Marina Crossings, a 633K SF project in the McKinley Park neighborhood from MAT L.P. and JPMorgan Asset Management, will deliver in October.
In suburban Philadelphia, where industrial development has been sluggish in recent years, Tamora Building Systems will soon break ground on a 63K SF spec industrial building in the borough of Marcus Hook in Delaware County, Pennsylvania.
The demand for industrial properties is even inspiring some creative redevelopment. In Denver, Cadence Capital acquired a 102K SF building that was formerly home to a sports betting lounge and family entertainment center. Cadence transformed the property into a distribution facility and showroom space for Ferguson Enterprises, a wholesale distributor of residential and commercial plumbing supplies, HVAC equipment and industrial products.
CBRE ranked 10 major U.S. industrial markets in terms of the cost of building a 500K SF warehouse, and found that even in metro Los Angeles, which has the highest cost of development for such a property (over $160/SF), industrial facilities are a good bet, with a rent spread of 27%.
For a 500K SF development, both the Inland Empire and Central New Jersey have costs of more than $100/SF, while Portland, Oregon, is at $100/SF. Pennsylvania's I-78/81 Corridor is nearly $90/SF, while Houston, Chicago, Phoenix, DFW and Atlanta are all less than $70/SF to develop a 500K SF warehouse.
CBRE's analysis found the largest rent spreads compared with development costs are in Chicago (43%), Atlanta (38%), Phoenix (35%) and Pennsylvania’s I-78/I-81 corridor (30%).