By Liz Young
Taylor Wood says bargaining with warehouse owners for storage space is far different than during the pandemic, when demand for industrial space was red hot.
“I’ve never seen a market like that, where we were basically scratching and clawing for every building,” said Wood, a broker at real estate services firm Savills. “There were five offers on every building.”
Now, Wood sees signs rents are flattening nationwide and even ticking down in some logistics-heavy markets like Southern California that were effectively sold out for years. Warehouse owners remain wary about publicizing lower rents, but there are more deals to be had and concessions being offered, he said.
“We’ve got these delayed start dates, we’ve got excess free rent, we’ve got more tenant improvement moneys,” Wood said.
Rents are even falling in some markets as the urgency to find space and stock up on inventory recedes, and leasing rates are plateauing, according to reports from real estate services firms Cushman & Wakefield and Savills.
The average asking rent for industrial real estate in the first quarter stayed flat at $9.73 per square foot per year, the first time in four years it didn’t increase on a quarterly basis, according to Cushman.
Asking rents in California’s Inland Empire, the sprawling industrial hub east of the ports of Los Angeles and Long Beach, fell 2.7% in the first quarter from the previous quarter, according to Savills.
Mark Russo, head of industrial research at Savills, said the effective rent tenants are paying in the Inland Empire is below the advertised asking price as more warehouse owners offer discounts such as months of free rent.
More deals have emerged as more warehouse space became available over the past year, a dramatic change from the height of the pandemic when there was fierce competition over limited available space, he said.
The pressure on retailers, manufacturers and logistics companies to grab available space “is gone for the most part,” Russo said.
The average warehouse vacancy rate across the U.S. climbed to 5.8% in the first quarter from 5.2% the previous period, according to Cushman. The rate remains low by historical standards but is up significantly from a nationwide 3% in late 2022.
Demand for storage space skyrocketed in 2020 as companies raced to position goods for rapid delivery to homes. E-commerce giant Amazon.com, for instance, doubled the size of its fulfillment network in 24 months as its business surged. Developers rushed to the market, building more than 2 billion square feet of storage and distribution space across the U.S. in four years, according to Cushman.
But in mid-2022 companies began pulling back on inventory restocking, and now they are delaying decisions to lease distribution centers amid high interest rates and an uncertain retail economy, said Dustin Burke, leader of the supply-chain practice at consulting firm Boston Consulting Group.
“We have seen a more balanced and long term thinking approach from most companies,” Burke said.
The ratio of inventories to sales at general-merchandise retailers, which tracks how much companies have in stock compared with what they sell, declined from a pandemic-era peak of 1.5 in August 2022 to 1.35 in January, according to the Census Bureau. That was roughly in line with the 1.31 ratio in January 2020.
With inventory levels down, “we should expect more normal behavior in terms of rents and in terms of growth in warehousing,” Burke said.
Rents grew over the past year even as warehouse availability climbed, partly because of unique dynamics in the industrial real-estate market, where deals usually last three to five years and leasing decisions are based on long-term prospects rather than short-term market conditions.
Warehouse rents remain well above prepandemic levels. Average asking rent across the U.S. in the first quarter was up 53% compared with the first quarter of 2020, according to Cushman.
New capacity coming online, much of it planned when demand was still strong, is helping push prices down. Approximately 115 million square feet of newly constructed space became available in the first quarter, far above the 10-year average of 42 million square feet completed per quarter from 2010 through 2019, according to Cushman.