Tenants are leasing warehouse space at a blistering pace this year to hold more inventory and mitigate transportation costs that are growing at a much faster pace than lease rates. Industrial leasing volume, including renewals, reached a record 587 million sq. ft. through July, up by 52% from the same period a year ago. Robust demand and a national vacancy rate of 4.0% have driven average rents up by 9.7% since August 2020.
Figure 1: Year-to-Date Industrial Leasing Volume
Note: Includes new leases and renewals signed from 1/1 to 7/31.
Source: CBRE Research, 2021.
Robust demand for goods and the ongoing delays at ports have increased the cost of shipping a 40-foot container via sea from Shanghai to the Port of New York/New Jersey to $14,136, up a whopping 262% year-over-year, according to Drewry Supply Chain Advisors. The cost to ship from Shanghai to the Port of Los Angeles is $11,362, up by 235%.
Shipping via air remains a much more expensive option even with seaborne cost increases. The average rate for international air cargo, which includes passenger and cargo flights, is up by 14% year-over-year, according to Clive Data Services. Domestic shipping offers little relief due to increases in demand and fuel prices. The Cass Freight Index for domestic freight (air, rail and truck) has increased by 43.1% since July 2020. Transportation cost increases are much higher than warehouse rent increases or the 4.5% jump in hourly wages for warehouse workers over the past year, according to CBRE Labor Analytics.
CBRE Supply Chain Advisory reports that transportation costs typically account for half of an occupier’s total logistics spend but can easily rise to 70%, while fixed facility costs (including real estate) account for only 3% to 6%. “It takes roughly an 8% increase in fixed facility costs to equal the impact of just a 1% increase in transportation costs,” says Joe Dunlap, Managing Director of CBRE Supply Chain Advisory.
Figure 2: Anatomy of a Company's Logistics Spend
* Includes Rent
** Includes Payroll
Source: CBRE Supply Chain Advisory, 2021.
With supply chain costs growing exponentially, occupiers are also looking to outsource both distribution and warehousing. Third-party logistics (3PL) providers have been the most active occupier type in 2021, nearly doubling their year-to-date leasing volume from last year to 121 million sq. ft. of bulk industrial space (100,000 sq. ft. or more) for a 31% market share. Rising transportation costs will continue to drive industrial demand for the foreseeable future, leading to continued rental rate growth, strong leasing volume and low vacancies.
Figure 3: 3PL Share of 2021 Leasing Volume Well Above Last Year
Note: Includes new leases and renewals from 1/1 to 7/31.
Source: CBRE Research, August 2021.