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Industrial Rents Support Additional Warehouse Development in Many U.S. Markets

6/26/18

This report was provided to us by global real estate services firm CBRE.

Projected rents are more than adequate in many markets, including Los Angeles, to justify additional development of warehouses and distribution centers, according to a new report from CBRE. Given the expected strength of rents, buoyed by demand and limited supply of modern logistics facilities, rising construction costs have not curtailed new warehouse development even as the land cost component has climbed to more than half of a project’s total outlay in places such as Los Angeles and the Inland Empire.

CBRE analyzed the gap between pro forma rents in various markets – the rental rates that developers can reasonably expect to obtain on newly built warehouses – and breakeven rents, which are the rents they’d need to cover overall development costs. In the 10 major markets that CBRE examined, the former exceeded the latter by 20 to 40 percent. CBRE’s analysis found the largest rent spreads in Chicago (43 percent), Atlanta (38 percent), Phoenix (35 percent), Pennsylvania’s I-78/I-81 corridor (30 percent) and Los Angeles (27 percent).

“This huge gap implies that if demand slows and the market cools a bit, there’s still a lot of cushion there,” said David Egan, CBRE Global Head of Industrial & Logistics Research. “This means that the development market is quite healthy, underwriting remains conservative, projects under development should preform quite well and the incentive is there for continued development.”

These spreads also confirm that the current market for industrial & logistics real estate has room to grow. Typically, a sign of waning momentum for a market comes when spreads between pro forma and breakeven rents narrow or vanish.

“These findings, much like other recent CBRE research reports, underscore that the Industrial & Logistics real estate market is undergoing a structural change due to demand tied to e-commerce,” said Adam Mullen, CBRE Americas Leader for Industrial & Logistics. “Many baselines in this industry are being redefined because of this fundamental change in the way we purchase and receive many goods. Anticipating this market’s trajectory requires vigilant monitoring and analysis of indicators such as these rent spreads.”





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