CBRE report points to elevated levels of tight industrial vacancies and steep rents

A new report issued by industrial real estate firm CBRE this week observes how vacancies continue to decline and rents continue to rise.

The report, entitled “Industrial Occupiers Experiencing Sticker Shock at Lease Expiration,” pointed to how robust demand and new construction delays have reduced the industrial vacancy rate down to 3.6% in the third quarter, whereas annual rent growth increase a record-high 10.4%. And it also highlighted how occupiers inking five-year leases back in 2016, with an average 3% rent increase, are now seeing net increases of 25%, while making decisions on new occupancy.

What’s more, the report noted that higher increases are expected in various markets, citing how an occupier with a five-year lease in Central New Jersey can expect to see a 64% increase, on average, with Philadelphia and New Jersey following, each at 62%, respectively. It also said that California leads the way, in terms of five-year rent growth, paced by low vacancy rates and large population concentrations. Rounding out the top five, for rate growth from 2016 to the present, are Inland Empire, at 61.7%, and Sacramento, at 52.9%.

For 10-year leases, CBRE explained the outlook is even more dire, with asking rents in 2021 now outpacing 2011 by 67%, coupled with what it called “much smaller annual rent escalations,” and occupiers needing to brace for rent increases ranging between 65%-to-75%.

“Despite this sticker shock, demand for industrial space hasn’t suffered yet,” the report said. “A rebounding economy, the need to hold more inventory onshore and increased e-commerce sales have led to record leasing of 826 million sq. ft. year-to-date through October. Indeed, industrial occupancy has become highly strategic given tight market conditions and the growing need to optimize supply chain networks. Nevertheless, rising prices may have some impact on demand over the course of 2022.”

Looking ahead, James Breeze, global head of industrial research for CBRE, said in an interview that rental rate growth and record low vacancy rates will continue in 2022.

“We expect all of the drivers for demand in 2021 to still be in place in 2022,” said Breeze. “Activity in under construction space is robust, alleviating any fear of higher vacancies due to oversupply of new construction. These record low vacancies will keep rent growth in its current trajectory.”

When asked if the market would still face capacity and space availability issues, were demand for industrial space to even slightly taper off, Breeze said that with the U.S. industrial market comprised of more than 16 billion square-feet of existing space, it would need a significant drop in demand to move the needle even a little.

“The biggest risk to a sharp decrease in demand would be from the current record amount of space under construction, but again it would take major reduction in leasing activity for even that space to make any kind of dent in the vacancy rate and as of now there is no sign of this,” he said.

Other notable drivers for current market conditions, outlined by Breeze, included the following:

• the need for space to service a growing online consumer base;
• the need for space to hold more inventory to avoid the disruptions to inventory in 2020; and
• the need for more locations in logistics hubs including seaports, inland ports, and air/rail hubs to cut down on transportation times and costs