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Warehouse tenants renewing their leases are running into sky-high costs stemming from a vacancy-starved market and global supply chain woes.
Industrial users with five-year contracts expiring this year face an average 25% rent increase nationwide thanks to dwindling supply and red-hot demand, according to a new CBRE report. Tenants are increasingly seeking to onshore inventory and production amid the global supply chain crisis, notching a record 826M SF of leasing year to date through October, according to additional CBRE research.
“With vacancy so tight, we will continue to see this trend in rents in the near term,” CBRE Executive Managing Director and Industrial and Logistics Leader John Morris said in a statement. “Many are willing to pay those higher rates now because of the critical nature of the space involved.”
The asset class is arguably the commercial real estate industry’s hottest sector, with nationwide vacancy rates at 3.6% in Q3 and year-over-year asking rent growth nationwide at a record 10.4%, according to CBRE. Tenants with expiring five-year leases face rent increases as high as 64% in Central New Jersey, or $9.57 per SF triple net, while users in California’s Inland Empire and Philadelphia face 62% rent hikes from their previous agreements.
Most industrial leases span five years with 3% annual rent increases. Some tenants with expiring 10-year leases face more extreme rate hikes between 65% and 75% from rates at the time of their signing in 2011, according to CBRE. Powerhouse industrial hubs in Atlanta and Dallas and rising markets like Boston continue to hit tighter supply-and-demand benchmarks, and investors are earmarking billions of dollars toward the asset class.
Supply chain challenges, which prompted massive onshoring by U.S. industrial users, have alleviated slightly, although significant gains in shipping delays won’t come anytime soon. The dynamics have created a mad dash for space, with both industrial tenants and investors in a “panic mode,” industrial giant Prologics CEO Hamid Moghadam said in late October.
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