Here’s How Much Warehouse Rent Could Increase This Year
Industrial real estate rent is expected to increase 10 percent in the U.S. this year, with warehouse vacancies expected to rise into the low-to-mid 4 percent range from 3.7 percent at the end of the first quarter, according to projections from Prologis.
Despite what may feel like a significant increase in 2023, it’s more conservative than what the logistics development firm pegged as a 30 percent rise in rent in 2022 amid rabid inflation that dominated the year.
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In the 2023 first quarter alone, Prologis says that rents increased 4.4 percent due to persistent competition for prime logistics space.
The first-quarter vacancy numbers were similar to projections from real estate management firm JLL, which reported earlier this month that vacancy across U.S. industrial real estate increased to 3.8 percent from 3.4 percent in the quarter prior. Prologis said the low-to-mid 4 percent expectation would remain “well below the historic average.”
Some markets, however, could see more interim vacancies, given the abundance of speculative space under construction. Prologis cited Dallas, Phoenix, Savannah, Ga. and Austin, Texas as areas where vacancies are popping up.
Prologis’ data shares similarities with JLL, which tagged the Dallas-Fort Worth market with the second-highest vacancy rate at 7.4 percent of industrial real estate, and the fifth-highest availability rate. And while JLL said Savannah had the lowest vacancy rate in the U.S., the port city also has the second highest availability rate among all U.S. markets at 15 percent due to new construction in the area.
Prologis said outside the four markets it noted, vacancy rates are still expected to remain slightly below 2019 levels—which hovered north of 4.5 percent—given limited current availabilities and few unleased buildings in the pipeline.
U.S. construction starts dropped by 40 percent compared with their average pace from the first three quarters of 2022 due to increased costs and a lack of financing.
“Combined with delayed decision-making and potential for improvement in the economic backdrop, the future reduction in deliveries (buildings that have completed construction) could produce another year of declining and ultra-low vacancies in 2024,” the Prologis report read.
The company, which owns or invested in approximately 1.2 billion square feet of properties and development projects in 19 countries, says vacancies could shrink to the mid-3 percent range by the end of 2024.
True months of supply (TMS), which calculates the amount of time it would take to absorb all available supply at the current demand run rate, was 30 months, a five-month increase from fourth quarter totals, Prologis said.
“Even as TMS rises from trough levels, it remains very low on an absolute basis and consistent with positive real rent growth,” said the study. “Markets and submarkets with the largest construction pipelines should post the largest increases in TMS, leading to growing differentiation in availabilities and rent growth by location.”
TMS is poised to rise this year before retreating below 30 into 2024, consistent with re-accelerating rent growth.
The rising rent prices and potential for tighter vacancies comes as third-party logistics (3PL) providers appear to be flocking to these facilities. Last year, 3PLs accounted for 40.8 percent of all big-box (minimum 200,000 square-foot) warehouse lease transactions in North America, according to an April report from commerce real estate company CBRE.
In occupying two out of every five warehouses, 3PLs were industrial real estate’s top tenant for the first time since CBRE started keeping score 10 years ago. Coming in second place are the usual market leaders—general retailers or wholesalers—at 31.5 percent of occupied leasing space.
As rents increase, retail giants are looking at every opportunity possible to cut fulfillment and delivery costs, with Amazon regionalizing its distribution network and leveraging AI to optimize inventory placement within its distribution hubs. Walmart expects approximately 55 percent of fulfillment center volume to move through automated facilities by the end of fiscal year 2026, for an expected 20 percent improvements in unit cost averages.
Regardless of who is renting these facilities, the role of industrial real estate is expanding across logistics and retail. The global storage and warehouse leasing market is set to grow by $91.27 billion at a compound annual growth rate (CAGR) of 7.17 percent from 2022 to 2027, according to a report from market research firm Technavio.
Prologis’ Industrial Business Indicator, which tracks overall business sentiment, hit its lowest level in 30 months in March to below an index level of 53 due to concerns about financial market volatility and overall economic uncertainty. The index rebounded to 56.2 in April, which Prologis calls a normal expansionary reading.
