Warehouse leasing plummets – because there’s so little new space to lease

Warehouse leasing plummets – because there’s so little new space to lease

Warehouse tenants soaked up about 41 million square feet of space in the third quarter of this year, a 23% drop from the previous quarter and less than half as much as a year ago, according to a new report from Transwestern.

It’s not for lack of demand. It’s all about lack of supply.

As the U.S. economy continues to shift from manufacturing to services, online retailers don’t just want any old warehouse, they want a new warehouse, one as close as possible to their customers. That has caused overall warehouse vacancies to rise, due to the unattractiveness of the older stock.

Meanwhile, developers are rushing into new construction in more urban locations. Tenants are signing leases on those warehouses, even ones that haven’t been built yet.

“The developers are the ones that are finding the solutions, and when they find the solutions there’s plenty of tenant demand to meet the space needs that they’re trying to create in the marketplace,” said Jimmy Hinton, managing director of investment and data analytics at Transwestern. “What we see often is that when developers announce that they have formulated a business plan, found a suitable site, and capitalized it, the tenants are eager to go ahead and commit, so that they can make their own plans to try to deliver their goods to the end consumer.”

When Amazon announced it would be providing same-day service to consumers ordering online, demand for more urban warehouses shot up. Unfortunately it is not easy for warehouse developers to meet that demand quickly.

“In the previous parts of the cycle, a lot of developers were building very large format buildings in suburban locations where logistics companies could come in and establish a major presence in a market where they didn’t have a location already,” said Hinton. “Increasingly, what they’re trying to do is find locations that are closer to the end delivery point, and as a result of that they’re facing increasing challenges finding locations that make sense for them from a size standpoint, from a location standpoint and from a cost standpoint.”

The amount of new industrial space leased in each of the past 38 quarters has exceeded the amount newly vacated or built for 38 straight quarters, according to CBRE.

Renovating and re-purposing older warehouses doesn’t work that well either, because those properties are either the wrong size and design or are simply in the wrong location. As for new construction, warehouse demand continues to outpace supply, despite a four-year surge in development.

“There currently is more than 255 million sq. ft. of warehouse space under construction, 70.2% of it on spec,” according to a June report from CBRE Econometric Advisors. “Since 2015, however, warehouse demand has outpaced new warehouse completions by 169 million sq. ft., and rents have increased by 19.2%.”

The growing value of this new space is incredibly attractive to investors in warehouse REITs, like Prologis, which have been outperforming in the past few years. That value is also attractive to private capital.

“Not only are we seeing the tenants have a major thirst for new product, we’re also seeing it from landlords and capital providers that are looking to invest in real estate as well,” Hinton said. “So this is very much a holistic shift and strategy not only in terms of the tenants that are using the buildings but in the people that are trying to own them and operate them.”

Original Article Here