Industrial Occupiers Experiencing Sticker Shock at Lease Expiration
December 1, 2021 3 Minute Read
Robust demand and delays in new construction dropped the overall industrial vacancy rate to 3.6% in Q3, with record year-over-year asking rent growth of 10.4%. Occupiers that signed five-year leases in 2016 with an average 3% annual rent increase are facing a much steeper 25% average increase today as they make new occupancy decisions.
Many markets will see even higher increases. An occupier with a five-year lease expiring in Central New Jersey will see the biggest average increase in the U.S. at 64%, followed by Philadelphia and the Inland Empire at 62%. California markets dominate five-year rent growth due to low vacancy rates and large population concentrations.
Figure 1: Markets Over the National Average Lease Expiration vs. Current Market Rent Differential
Note: Based on a five-year lease signed in 2016 with 3% annual increases.
Source: CBRE Research, CBRE Econometric Advisors.
An occupier with a 10-year lease expiring today can expect even steeper rent increases. Industrial market conditions favored occupiers in 2011, when the overall vacancy rate stood 5.1 points higher at 8.7%. Asking rents in 2011 were 67% lower than today, with much smaller annual rent escalations. Overall, occupiers may face rent increases of between 65% and 75% compared with the lease they signed in 2011.
Figure 2: Q3 2011 vs. Q3 2021 Industrial Fundamentals
Source: CBRE Econometric Advisors.
Despite this sticker shock, demand for industrial space hasn’t suffered yet. A rebounding economy, the need to hold more inventory onshore and increased e-commerce sales have led to record leasing of 826 million sq. ft. year-to-date through October. Indeed, industrial occupancy has become highly strategic given tight market conditions and the growing need to optimize supply chain networks. Nevertheless, rising prices may have some impact on demand over the course of 2022.