Why Is the Industrial Leasing Market White Hot?

By David J. Petersen

According to national broker and research firm CBRE, e-commerce businesses led the nation in leasing new industrial space in 2020. This is understandable given that we were all stuck at home during quarantine. In 2021, however, e-commerce’s share of new industrial leasing dropped to third at 10.7% of all deals. Retailers and wholesalers took over the top spot at 35.8%, with third party logistics companies (i.e., warehouses) in second place with 32.2%. Overall, demand in 2021 totaled 105.3 million square feet, the largest amount since CBRE began tracking the data in 2017.

What has caused this significant shift? In two words, the answer is gas prices. The pandemic drove a surge in online shopping, and while some of the change in consumer behavior will remain permanent, we can expect many customers to return to brick-and-mortar stores as the pandemic wanes. With fuel prices up as much as 21% in the last month, those in the business of delivering goods to customers, whether on a sales floor or via delivery, are highly motivated to store those goods as close to their customers as possible. Also, those businesses want to be closer to their employees, who are no doubt factoring in travel time and gas prices when choosing between workplace options. And, given recent supply chain disruptions, users are hedging their bets against future supply problems by increasing their inventory storage space.

As a result, demand has skyrocketed among retailers, wholesalers, and warehousers for industrial space close to population centers. At the same time, there is a dwindling supply of close-in space in many markets that are land-constrained, and construction costs are up significantly. Estimates vary, but tenants should expect double-digit rent increases in the short term, and for annual lease rent escalators to be closer to 4%. Overall, tenants can expect real estate costs as a percentage of the company’s overall costs to roughly double. As a hedge against those rising costs, tenants may try negotiating a shorter term or an earlier reset to market rents, but those strategies are based on an assumption that fuel costs will flatten or recede in the longer term. For industrial land developers, while land is scarce demand is intense, so the next few years could set records for new projects coming online.