Rising transportation and supply chain costs are driving industrial real estate leasing activity

Data recently issued by Los Angeles-based industrial real estate developer CBRE indicated that leasing volume for the United States industrial market is on track for a new annual record in 2021, with total activity through July, at 587 million square-feet (SF), a 52% annual gain.

Should this level of leasing activity continue, CBRE said that 2021 would top 2020, the current record, at 713.3 million SF. What’s more, it noted that robust demand, coupled with a 4.0% national vacancy rate, have led to average rents climbing 9.7%, going back to August 2020.

The firm explained that significantly higher transportation costs, which are rising faster than rental rates, are serving as a driver for the uptick in leasing activity. This has been seen in the form of what it called robust demand for goods, as well as ongoing delays at ports, which have led to increases of more than 230% to ship a single 40-foot container from Shanghai to the Port of New York/New Jersey and Port of Los Angeles, as per data from Drewry Supply Chain Advisors, according to CBRE.

And it also observed that air shipping is still “a much more expensive option,” even against the backdrop of rising ocean costs, too, with average air cargo rates up 14% annually, as per data from Clive Data Services.

“CBRE Supply Chain Advisory reports that transportation costs typically account for half of an occupier’s total logistics spend but can easily rise to 70%, while fixed facility costs (including real estate) account for only 3% to 6%,” said CBRE.

And as supply chain costs have increase, CBRE said that occupiers are keen on outsourcing distribution and warehousing services, with 3PLs leading the pack, having nearly doubled their year-to-date leasing volume through July, to 121 million SF of bulk industrial space, for a 31.3% market share.

Rounding out the top three are: General Retail & Merchandise, at 96 million SF (24.8% market share), and E-commerce, at 52 million SF, (13.8% market share).

“Limited availability is of acute concern when occupiers have an immediate space change need,” said Joe Dunlap, managing director of CBRE’s Supply Chain Advisory. “However, fixed facility costs (largely driven by location, space, NNN (triple rate lease) real estate rates, building type, etc.) are not the only concern.  Of equal or greater concern are trade-offs between rising transportation costs and facility variable costs (largely driven by volumes, degree of automation, job types, headcount, productivity rates, wage rates / benefits / taxes, operating days / hours of the week, etc.) compared with facility fixed costs, inventory carrying cost, reverse logistics and other logistics cost.  Occupiers clearly understand these costs elements individually have been rising and have trade-offs.”  

Dunlap added that occupiers are not necessarily actively expanding domestic warehouse space unless that tipping-point shifts in their business and tips the equilibrium in these trade-offs. 

“For example, occupiers who have dramatic growth might need additional storage space,” he said. “Conversely, those experiencing contraction in sales might see a need to reduce storage space.  Depending upon the situation, occupiers going through mergers, acquisitions or divestitures might see increases or decreases in warehouse space needs.  Companies concerned about business continuity might find the need to build inventory redundancy and thus additional warehouse space needs. And, companies seeking to increase speed-to-customer or specifically time-in-transit may also find a need to shift warehouse needs.”

As for if 3PLs will continue to aggressively lease large amounts of warehouse space for the foreseeable future, John Morris, executive managing director and leader of CBRE’s Americas Industrial & Logistics business, said that there are exceptions, but generally 3PLs often don’t lease space independent of a client contract and the lease term typically coincides with the term of the client contract. 

“Therefore, 3PLs will not aggressively lease large amounts of warehouse space without corollary client commitments,” he said. “That said, the 3PL segment has historically been the largest segment of occupiers.  Comparing August 2021 to the same period in 2020, 3PLs represented about 31% of industrial lease transaction over 100,000 square feet, compared to 24% in the same period 2020.  As companies determine whether to operate warehouse space in-house or outsourcing, many will focus on running their business and continue to leverage the deep expertise and value proposition 3PLs offer, particularly with the ever-changing logistics needs, supply chain disruption and their evolving businesses.”