This ‘Bad News, Good News’ Story is Far From Over
Supply chain disruptions have had a direct impact on CRE—not only in port cities, but in any market that relies heavily on warehouses; space has become scarce and rental rates have spiked. In response, expert brokers have had to become more creative and more assertive—and they are advising clients to do the same.
“We’ve seen the single biggest impact as just a further delay in the process of supply creation, and particularly on the industrial side of the market right now that lack of supplies is what is driving really, really strong rental rate growth,” says Gabriel Silverstein, SIOR, managing director, SVN | Angelic, Austin, Texas.
There is a lot of money available for construction and high interest in creating new supply, he says, but there are also two things holding it back: municipalities are possibly moving more slowly than ever, and, of course, the supply chain.
“When somebody tells you that you will have a 56-week [wait] for roof trusses and an industrial facility usually builds in 40 weeks, that’s a pretty big material change,” says Silverstein. “It not only delays the completion of some of that new supply, but it also drives up the cost basis—not just because materials are higher and in demand, but also because of carrying costs. With an extra four months there’s a significant cost in interest, land; that’s real money.”
“It has created significantly more demand for both warehousing space and yard space for storage of trailers, containers and chassis,” adds Christopher Sheehan, SIOR, senior executive vice president at Colliers in El Segundo, Calif. “Clients are complaining about getting the inventory they need to make their product and/or to sell their product. Lack of labor is also negatively impacting our clients’ ability to provide their goods and services.”
Of course, ports are bearing a huge brunt of the burden. “The supply chain issues and increased demand for warehousing have placed tremendous pressure on our industrial availability, with a current vacancy rate of 0.6% and some of the highest lease rates in North America,” reports Baktash Kasraei, SIOR, vice president with JLL in Vancouver, Britsh Columbia, the largest port in Canada. “Occupiers are seeing 200% rental increases from five years ago.”
And Anthony Bergeman, SIOR, executive vice president/principal, DAUM Commercial Real Estate Services, Gardena, Calif., who works the Los Angeles ports and Long Beach logistics markets, is seeing a similar picture. “Vacancies have always been historically low,” he says. “Now it’s just magnified because everything has jumped up so quickly.”
He says he’s seeing a vacancy rate of less than 1% vacancy, with 45% “bumps” as pretty standard in rent escalations, and the rare new developments are pre-leased during construction—“even out to the Inland Empire.” Bidding wars are common, he adds, with tenants willing to pay more for space near the ports.
There’s also a premium for functional space, which is lacking in the market. “There’s only a finite amount, and that will be the market for the foreseeable future,” he says.
Read the full article in the Spring 2022 issue of SIOR Report out now!