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Owners Focus On High-Credit Tenants As Industrial Market Keeps Heating Up

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With industrial vacancy rates at historic lows, owners have been vying for more creditworthy tenants instead of higher rental bids, GlobeSt reports.

“I think it boils down to the fact that landlords have a choice,” Cushman & Wakefield Executive Managing Director of Industrial Brokerage and Global Supply Chain Solutions Rick Ellison told GlobeSt. “It’s become common for multiple tenants to compete for the same availability. Landlords are choosing their best option.”

Warehouse

Owners are finding that they can still attract a high-quality tenant without needing to offer discounts in rents. That means tenants lacking credit will have fewer options and more competition for space as the market continues to tighten. 

The shifting dynamics within the industrial market are creating conditions not seen in previous market cycles. The booming e-commerce market has increased demand to the point that it is outpacing supply.

The industrial market delivered 203M SF during the 12 months ending in March, but absorbed 223M SF, CBRE Global Head of Industrial and Logistics Research David Egan said during a recent conference.

Demand has been so high that it has started to create a surge in development in smaller tertiary markets in the South and Midwest. A lack of available land has been pushing developers farther out of main urban cores as well.

“The warehouse industrial market is incredibly tight,” Cushman & Wakefield Vice President and Americas Head of Logistics & Industrial Research Jason Tolliver said in an interview. “Where we see that play out is higher build-to-suit activity.”

Demand for manufacturing spaces also is rising throughout the country, especially in the South. The wage difference between overseas and domestic operations has tightened, making U.S. manufacturing more cost competitive, Tolliver said. The demand for just-in-time manufacturing and delivery also is pushing operations closer to customers, he said.

Multiple Low-Vacancy Industrial Markets

Amazon Fulfillment Center
Inside an Amazon fulfillment center

Of the 80 markets Cushman & Wakefield tracks, vacancy averages about 5%, Tolliver said. Many of the markets are much lower. The East Bay-Oakland market in the San Francisco Bay Area has vacancy at 3.7% while New Jersey’s market is at 3.3% vacancy, according to Q2 industrial market research from Cushman & Wakefield.

In the Greater Los Angeles market, which is the tightest industrial market in the country, vacancy rates are at 1.5%, according to a Cushman & Wakefield report. Orange County’s vacancy rate is also extremely low at 1.9%.

The Los Angeles market is so popular that even though it has the highest cost of development for industrial properties at over $160/SF, it has a rent spread of 27%. A 500K SF development in the Inland Empire, where vacancy is at 4.1%, can garner rents of more than $100/SF, according to research from CBRE.

Demand for e-commerce continues to drive demand in Southern California, according to the most recent Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey. Industrial is currently viewed as the hottest sector across all markets in California and many developers remain optimistic about the industry's future.