Slower demand, but US warehouse rents rise in 'tight and expensive' market


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Nov 07, 2023

Slower demand, but US warehouse rents rise in 'tight and expensive' market

Demand for warehouse space in the US has been declining – but this has not

Demand for warehouse space in the US has been declining – but this has not stopped rents rising.

According to real estate investment trust Prologis, they will increase by 10% this year.

The slowdown in global trade is finally nudging the vacancy rate in the US warehousing market upwards. In the first quarter, the national vacancy rate climbed to 3.5%.

That's up 50 basis points from the final quarter of 2022 and the highest level it had reached in 14 years, noted commercial real estate services firm CBRE.

During the first three months, 89 million sq ft of warehousing space became available and 144.1m sq ft of new capacity entered the market. Owing to the lagging demand, the net absorption rate was the lowest since Q2 20, at the height of the pandemic.

Regional markets around ports, which used to be extremely tight, have also registered slower uptake, CBRE reported.

And the trend has continued. The Prologis Industrial Business Indicator shows a value of 56.2 for April. While still in expansion territory (numbers above 50 indicate growth), it was down from 59.7 for the first quarter.

Prologis reckons industrial real estate activity is heading to pre-pandemic levels.

But, despite the downward trend in capacity absorption, warehouse rents have continued to rise. Average rent climbed 3% in the first three months over the previous quarter and an 11% increase on the same period in 2022, according to CBRE.

Prologis registered a 4.4% rise in rates for the first quarter.

"You would think rents have eased in a slower freight market, but it's just the opposite," said Bob Imbriani, EVP international of forwarder Team Worldwide. "The market is expensive and tight."

His company has been looking to increase its warehouse capacity in the Dallas area. Rents for new facilities would be as much as 60% higher than current warehousing costs, while renewing leases would bring rent hikes of 30%-40%, he said.

A big factor in this is a significant slowdown in available new capacity. Building starts have slowed drastically in response to the weaker market and high interest rates, as well as tight lending conditions, Mr Imbriani explained.

The number of warehousing projects under construction has declined for the first time over four years, reported CBRE. It fell 7% from the final quarter of 2022.

Construction starts in Q1 were down 40%, compared with the first three quarters of 2022, Prologis found.

And capital has also been less freely available than before. Financial experts point to the regional banking sector, which has been the chief source of funds for industrial property development. In the wake of collapses of regional banks like Silicon Valley and First Republic, lenders have tightened the purse strings. The slowdown in commercial real estate lending picked up momentum in the first quarter as a result of the stress in the banking system.

CBRE's Lending Momentum Index fell 33% from the fourth quarter of last year, and 53.5% year on year.

However, investors are still keen on the industrial property market. Realterm, an investment management firm focused on the transport sector, recently raised $532m for the recapitalisation of a portfolio of 61 assets, a mix of truck terminals, drayage yards and other warehousing sites. And it can expect rents to keep rising.