Warehouse Rental Rates Jump as Industrial Capacity is Squeezed
Prologis report says average industrial real estate rents rose 9% in 2015, but gains should slow this year
ENLARGE
A Constellation Brands Inc. distribution center in Louisville, Ky. Photo: Bloomberg News
The first annual Prologis Logistics Rent Index report, which examined net effective rents in 57 major global markets, found that the U.S. outpaced the rest of the world in 2015 in the growth of industrial rental costs.
Domestic industrial rents rose 9% last year and were up 25% over the past three years. Globally, rate growth was also strong, with rents rising 6% last year and more than 20% since 2012, according to analysts with Prologis Inc., the world’s largest owner of industrial real estate.
“The U.S. is absolutely in an expansion mode,” with customers growing and vacancy rates falling to all-time lows in many markets, said Chris Caton, head of research at Prologis. The top five markets in the world with the fastest-growing industrial rental rates were all in the U.S., and many of the current rates have surpassed the previous peaks following a retreat after the recession.
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In its most recent quarterly earnings, Prologis reported a 2015 occupancy rate of 97% across its real estate portfolio. The company said the current industrial vacancy rate in the U.S. is 5.7%.
The economic recovery, along with the rise of e-commerce, has driven up demand as growing businesses add warehouse space and seek to upgrade from their current facilities. But the addition of warehouse capacity has lagged behind demand in some markets.
In San Francisco, Los Angeles, New Jersey and South Florida, for example, industrial real-estate developers face barriers such as a lack of available land that can accommodate a large warehouse. Getting development permits and approval from local communities also is a challenge in some places, Mr. Caton said.
There is growing demand for warehouses close to cities to serve e-commerce demands for rapid delivery, but that can put industrial developers in closer competition for different kinds of real-estate projects, including housing.
“Either it’s just not feasible to construct a logistics facility or you might have an older logistics facility be bought up and turned into something else,” he said—all of which drives up rents.
‘Discounts from the recession are being unwound.’
According to the report, rents will likely rise 5% to 10% this year in major markets. Prologis advised that customers could see rents as much as 10% to 20% higher than the last time they leased space under multiyear deals.
Seattle, Southern California, Central Florida and Atlanta will likely see rates rise “quickly” this year, although in general the U.S. nationally should be more stable.
“I would expect 9% to not be repeated, and for it to be lower,” Mr. Caton said.
Despite the growth in the U.S., the highest rental rates globally were in the United Kingdom, Japan and Singapore, where replacement costs also are rising significantly. Land values and labor costs are also going up in China, where, Mr. Caton said, “e-commerce is an important part of that story.”
Write to Erica E. Phillips at erica.phillips@wsj.com
