The U.S. industrial market is on track for record rental volume with activity through July reaching 587 million square feet, up 52% ââfrom the previous year, according to a new report from CBRE.
Significantly higher transportation costs – which are rising faster than rental rates – are helping fuel this strong rental business.
Soaring transportation costs – sea, land and air – are the result of backlogs at ports, rising fuel prices and strong increased consumer demand driven by the growth of e-commerce and the continuing effects of the pandemic.
For example, the cost of shipping a 40-foot container by sea from Shanghai to the Port of Los Angeles increased 235% from the same period last year, according to Drewry Supply Chain Advisors.
To guard against a further increase in costs, companies have expanded national warehousing space to reduce the frequency of long-distance shipments.
And it’s more than that. The so-called “rule of 1.5”, is played today, according to Adam Roth, director of NAI Global Logistics at NAI Hiffman.
âI’ve learned over the past 25 years that when an event occurs in transportation, trucking and retailing, it will hit the industry a year and a half later,â Roth said.
In other words, the events of a year and a half ago are influencing the industry today. Transportation costs, for example, are the biggest dictator in siting for distribution facilities.
âThe costs of commercial real estate are just a rounding error,â he said.
In December 2017, regulations were passed requiring truck drivers to record their hours in an electronic recording device, making it difficult to tamper with their hours.
âIt took 8-10% of the truck driver’s capacity, which impacted transportation costs for distributors,â Roth said. âThere are two ways to compensate for the length of the transport. One is modal transport, the other is more real estate. And the real estate costs are much lower than the transport costs.
Today, the rule of 1.5 is still in play. Factors that will influence demand over the next 18 months include insurance costs, which really weigh on the trucking industry during the month and the lack of increasing reliability of the international supply chain, said Roth.
âAs the international supply chain becomes more expensive and unreliable, domestic manufacturing becomes more competitive,â he said. “All of this bodes well for industrial real estate and absorption.”
Choose to pay higher storage rents
According to CBRE’s Supply Chain Advisory, transportation costs can account for 50 to 70% of a US company’s total logistics expenses. Fixed costs for facilities, including real estate, are only 3-6%.
âIt takes about an 8% increase in fixed installation costs to match a 1% increase in transportation costs,â said Joe Dunlap, managing director of CBRE Supply Chain Advisory. âThe increase in real estate costs is pale compared to what they are experiencing with transportation costs. They calculate that it is better to pay higher rents if they can reduce transportation costs with a strategic occupancy plan.
Strong rental activity this year caused the national warehouse vacancy rate to drop to 4.0%, which in turn catalyzed a 9.7% increase in rental rates in the first year.
The appetite of logistics companies for warehouse space is not waning
Third-party logistics providers (3PLs) have benefited from the exponential growth in transportation costs as more occupants have responded by outsourcing distribution and warehousing. As a result, 3PL leased 121 million square feet of industrial bulk space (100,000 square feet and over), representing a market share of 31.3%. This is nearly double the 66.8 million square feet (24.5%) of 3PL leased in the same period last year.
âLocal markets are all feeling the pinch as costs rise and material delivery times have certainly increased,â said Glynn Mireles, senior vice president of CBRE Industrial Services in Houston. âIn Houston, the cost of a shipping container last year was about $ 5,000; now the cost is over $ 20,000 per unit container. Our industrial brokerage team expects demand for warehouse space to continue, especially from 3PL order fulfillment companies. The reason is that their customers load inventory when the products are available to avoid facing long lead times and increasing transportation costs. “
Retailers and manufacturers increasingly rely on the expertise of the 3PL market to help them address significant supply chain challenges, said John Morris, Executive Managing Director and Head of Industry and Logistics of CBRE for the Americas. âAs a result, 3PL’s robust appetite for warehouse space shows no signs of waning. “