It has been boom times for several years for companies building and leasing warehouse and distribution center space in the US and much of the rest of the world.
For example, last week warehouse space owner Prologis reported that occupancy rates at its facilities hit an incredible 97.1% in the fourth quarter - an all-time high. Prologis saw rents in the U.S. jumped by more than 23% year over year, the company said, with global rates increasing by 16%.
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Real estate firm CBRE reported similar news, saying in urban areas such as Los Angeles and Seattle less than 5% of total warehouse capacity is available for leasing, sending rates soaring.
However, the rate of growth in absorption of US warehouse space decelerated in Q4, the report from CBRE said.
There was a net new 47 million square feet of net US warehouse space leased or owned in Q4, the CBRE research found, down 41% from Q3 and 36% from Q4 2015. But that still makes it the 27th consecutive quarter of positive net absorption - basically meaning more warehouse space was taken than let go - the longest such streak in more than 20 years.
Despite the dip in Q4, all told for 2016 there was 256.7 million square feet of warehouse space taken in the US in 2016, just one percent below the total for 2015.
The chart below shows just how strong demand for US warehouse space has been starting at the end of 2012.
CBRE says that in Q4 "supply once again did not keep up with demand" for warehouse space, though the gap is shrinking. There was 44.7 million of new warehouse space delviered to the US market in Q4, at the top end of the recent range but down 18% from Q3. But the pipeline of new space construction grew 8% quarter over quarter, to 198 million square feet.
Absorption of US Warehouse Space on Record Streak
The most space is being built in the Inland Empire region near Los Angeles, with an 21.2 million square feet of space under contruction. That was followed by the Dallas/Ft. Worth area at 19.5 million square feet, Chicago at 16.8 million quare feet, the Philadelphia area at 14.3 million square feet, and greater Atlanta at 13.4 million of in progress construction.
With new construction continuing to lag demand, availability rates have fallen every quarter since Q3 2010, an amazing streak. Overall availability fell to just 8.2% in Q4, though as mentioned above it is much below that in some markets.
Net Asking Rents Reach Record High
Given the supply and demand situation, rents are still headed up. The average rate in Q4 was $6.58 per square foot, a record high and up 1.5% quarter over quarter and 6.3% year over year. That annual growth rate was the highest for a quarter since 2007. Rents have been up for 12 consecutive quarters.
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Rents were up the most in the quarter in San Jose, San Francisco, Ft. Lauderdale, Richmond and Baltimore.
Of course, that average rent number masks huge difference across different market. Rents were an amazing $30.36 per square foot in the San Francisco area, by far the highest area in the US. Number 2 is San Jose, at $19.34, followed by San Diego ($13.60), and then Austin, Orange County California, Northern Virginia, Dallas-Ft. Worth, all just over $10 per square foot.
Conversely, space can be had for just $3.37 in Greenville South Carolina, and $3.40 in Louisville Kentucky. While space in Northern Virginia goes for over $10 per square foot, as noted above, it is only $4.65 in nearby Richmond.
But the worst of the cost increases may be abating, in good news for shippers. Prologis CEO Hamid Moghadam said last week that "We are getting into the more mature part of the cycle. It's more of a balanced market, with modest rental growth."
Similarly, CBRE said it expects industrial real-estate completions to consistently top 50 million square feet per quarter this year, a key threshold that usually signals stable availability rates.
So it appears like warehouse space rents aren't headed down any time soon, but the rapid rate of increases we've seen over the past few years may be starting to moderate, as supply in the end usually does catch up with demand.
What are you seeing in terms of warehouse rates and availability? Are we near the top? Let us know your thoughts at the Feedback section below or the link above to send an email.
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