Shippers face capacity issues in different aspects throughout their supply chain which includes their industrial real estate needs. Warehouse vacancy rates continue to decrease and industrial vacancy is now at a cyclical low of 7.3%. However, this includes buildings that may not be deemed suitable to do business so it’s estimated that the actual vacancy rate to be much lower. DTZ surveyed 60 markets and 19 reported having a vacancy rate of below 5%. Available industrial real estate is becoming scarcer and rental rates are rising because of several factors.
Unlike other countries, the United States population continues to grow and is expected to continue throughout 2060 with the population growing to about 416.8 million in comparison to a population of about 318.7 million today1. As the population grows, new consumers will be introduced to the market and increase the demand for goods. To support the growing demand, businesses will need to reconfigure and expand their supply chain infrastructure.
Consumer spending is also increasing. Fuel prices have declined which gives consumers more disposable income. With that spending comes more demand for goods and companies have to be prepared to meet these needs. Ecommerce sales have changed the way consumers shop and cause businesses to shift their distribution locations to reach their consumers quickly. Auto and home sales are also on the rise which is a good sign for the economy. As consumers spend more, smaller businesses are doing well, and in response they are more confident to fill up smaller warehouse space. In the past year small warehouse space occupancy rate increased from 89% to 95%2.
New Construction and Development
A reduction in available spaces has led to a lease rate increase of nearly 18% since 2012 and it’s expected to increase an additional 15% by 20183. With demand for industrial real estate on the rise and vacancy rates at a minimum, many companies are looking to develop and customize their locations. However, this isn’t a quick solution. Absorption of existing real estate exceeds the construction of new sites. The demand for warehousing and distribution centers is between 225 million and 230 million square feet leased a year and new construction is only at about 165 million square feet4. CBRE predicts that new construction won’t truly meet demand until 20175 and as demand increases so will land prices6.
The United States has a lot to offer international companies who wish to invest in the area. The U.S. has some of the cheapest energy throughout the world. Natural gas in the region is one-third the price of what it is in Europe and one-quarter of the price it is in Japan7. Aside from low energy costs, skilled labor is also appealing to many businesses as they are moving into the area and investing in industrial space for manufacturing and distribution. In fact, U.S. manufacturing output has increased 50 percent in the past 25 years8. Expanding trade flows also contribute to the amount of industrial real estate needed to store and move international products throughout the country. The ports are moving more freight than ever before which affects available real estate in the area. For instance, the Los Angeles vicinity has a vacancy rate of less than two percent9.
As demand for industrial real estate continues to grow, available spaces become more sought after. Consumer spending is on the rise and businesses have to adjust their supply chain infrastructure. With these things in mind, it’s important to plan accordingly to budget and prepare for increased warehouse rates, as well as a certain amount of lead time for real estate to become available.