Freight rates are sliding and supply chain disruptions appear to be easing, but the market for industrial space is still running hot, forcing shippers to confront big jumps in warehouse rents and record-low vacancies.



Experts don’t expect the surge in demand for warehouse space and elevated rents to drop off soon.

“The pandemic drove record demand for the past two years, which translated into record low vacancies and unprecedented rent growth,” the chief executive of Prologis Inc., one of the largest industrial landlords, said in the company’s earnings news release. “As conditions normalize, we are still seeing healthy demand that rivals past peak cycles and, informed by our proprietary data insights, we expect strong demand for our properties to continue.”

Prologis reported last week that its average occupancy had hit 97.6% in the second quarter of this year, up from 96% in the same period of last year.

Real estate services firm CBRE Group Inc. said last week that the industrial vacancy rate for the Inland Empire—a logistics hub near the busy Southern California ports—fell to an all-time low of just 0.2% while average taking rents there jumped 16.3% from the previous quarter.

The firm reported in April that the national vacancy rate stood at 3.1% and the average asking rent hit a record high of $8.94 per square foot. Another real estate firm, Cushman & Wakefield, unveiled similar figures in its second-quarter industrial report released July 11.

(Source: Cushman & Wakefield U.S. Q2 2022 Industrial report)

Where Are Rents Headed & Why Are They Persistently High?

Demand for industrial space should withstand an economic downturn, propping up rents, CBRE said in a May report. That continuation of heightened demand, the firm said, is driven by onshoring and larger inventory volumes stored near consumers as shippers seek buffers against future supply chain disruptions. That, and retail sales “remain solid,” the firm said.

“While inflation remains near a 40-year high, it is primarily being driven by the energy, automobile and food sectors—not by general merchandise that is widely stored in warehouses,” CBRE researchers wrote. They added that “large companies are leasing more warehouse and distribution space to hold more inventory as a check against rising supply chain costs.”

Shippers are also less likely to respond to jumps in the cost of storing goods than they are to, say, swings in trucking freight rates, because warehouse rents make up such a small slice of overall logistics expenses. Storing goods close to customers can also help shippers save on transportation costs, making the scramble for space in dense urban areas worthwhile.

Cushman & Wakefield expects vacancy rates will stay below 4% for the rest of this year and asking rents will keep rising year-over-year through 2022 before decelerating “over the next couple of years,” according to the firm’s second-quarter report.

Warehouse construction, while booming across the U.S., hasn’t been able to keep up with demand for space since consumers pivoted their spending to goods from services during the pandemic and builders began running out of materials left and right. Supply of space is growing, Cushman & Wakefield said in its report, but “fears of oversupply or imminent market imbalances are likely overblown” given the current tightness of the market.



The Federal Reserve’s slate of interest rate hikes—measures meant to cool inflation— could also make development more expensive, potentially slowing construction. Industry sources told Freightwaves the Fed’s actions are leading developers to pause or even abandon projects.

What Shippers Can Do Until the Market Cools

Outsourcing warehouse operations to a third-party logistics company can save shippers money, as those 3PLs tend to run and spend more efficiently in bulk.

Prologis also suggests cross-docking—in which products are transferred directly from supplier to customer on a truck, for instance, avoiding long-term storage—as well as optimizing storage space.

“It is essential to learn the dimensions of the forklifts you’ll need for every type of product,” the company advises. “Organize your storage by the aisle dimension required for forklift access. Choose a narrow and tall rack build to lower your required square footage.”

Shippers can also reduce their stock levels through increased visibility and smaller orders, making their inventory more efficient and thus reducing storage needs.

As for whether to seek out storage space far from dense population centers, that decision will require a cost-benefit analysis. With the price of fuel skyrocketing, it may ultimately cost more to transport items from the suburbs or rural areas where rents are lower than to lock in a high rent inside or close to an urban hub.

Sources

https://www.cbre.com/insights/figures/inland-empire-industrial-figures-q2-2022

https://www.cbre.com/insights/figures/q1-2022-us-industrial-figures

https://www.sec.gov/Archives/edgar/data/0001045609/000156459022025889/pld- ex992_6.htm

https://www.sec.gov/Archives/edgar/data/0001045609/000156459021036956/pld- ex992_7.htm

https://www.cbre.com/insights/briefs/thriving-us-industrial-market-well-positioned-to- withstand-economic headwinds#:~:text=Source%3A%20CBRE%20Research%2C%20April%202022.&text=With%20an%20overall%20vacancy%20rate,lowest%20level%20since%20Q3%202020

https://www.wsj.com/articles/americans-are-pushing-back-on-the-warehouse- construction-boom-11649422800

https://www.wsj.com/articles/builders-hunt-for-alternatives-to-materials-in-short-supply-11633512601

https://www.freightwaves.com/news/logistics-warehouse-activity-may-cool-as-interest-rates-heat-up

https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/us-industrial-marketbeat

https://www.prologis.com/what-we-do/resources/best-ways-to-reduce-warehouse-costs