Inflation pressure hits new warehouse leases

December 6, 2021  –  Rental rates to replace expiring multiyear warehouse leases are rising at a sharp pace as real-estate firms look to incorporate the higher prices they have taken during the pandemic into new contracts.

Prices to lease industrial properties are up an average of 25% over the rates at the end of five-year contracts that expired this year, according to a report from real-estate firm CBRE Group Inc.

The increases, which come as strong consumer demand and a surge in e-commerce business have triggered a rush on distribution space, are extending higher supply-chain costs to customers that had long-term contracts that insulated them from the rising warehouse expenses.

The Wall Street Journal reports that the U.S. national average vacancy rate fell to 3.6% in the third quarter, down from 4.3% the year before, and the lowest level in data going back to 2002. Space is especially tight at key distribution hubs like the Inland Empire in Southern California, where the vacancy rate recently dipped to 0.7%.

CBRE says leasing rates in the third quarter were up 10.4% year-over-year. With many leases now expiring, the new CBRE report suggests landlords are looking for big hikes from tenants that had signed multiyear leases before the pandemic sent industrial real-estate demand into overdrive.

The rate increases, which CBRE compared with long-term contracts up for renewal during the third quarter of this year, have been stronger in the high-demand regions. Rents to replace leases expiring this year in central New Jersey, Philadelphia and the Inland Empire near the ports of Los Angeles and Long Beach were more than 60% higher than rates for leases that started in 2016.

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