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Warehouse Rental Costs, Vacancies Both Up

There’s a puzzling disconnect between warehouse rental prices and industrial real estate vacancies: both are rising, according to The Wall Street Journal (subscription). 

What’s going on: “[T]he price of warehouse space [has gone] up 50% since the spring of 2020, when exploding consumer demand driven by the pandemic sent the market for warehouses skyrocketing.”

  • “Yet, vacancy rates for industrial real estate are also rising, reaching 4.1% in the second quarter after bottoming out at close to 3% late in 2022…”

Why it’s happening: The simultaneous rise of both cost and vacancy is due partly to the “particular dynamics of the industrial real-estate market, experts say, where warehouse operators and their customers typically sign deals for three to five years, basing leasing decisions on long-term prospects rather than short-term market conditions.”

The bigger picture: Despite this mismatch, industry sources say that the warehouse rental market is still comparatively tight.

  • Though vacancies jumped in Q2 of this year, they are still well below the average vacancy rate before the pandemic.
  • Thanks to the growing number of manufacturers increasing production in the U.S., competition for warehouse space can still be fierce in some cases.

Newer facilities: Over the past year, warehouse operators built a slew of new facilities, but these were often equipped with the latest technology and priced at the top of the market—which also helped drive up average rents, one source told the Journal.

  • And that new construction may be petering out. “Developers have recently been paring back projects amid declining leasing activity and rising interest rates, which could prolong a shortfall of logistics space and put additional pressure on asking rents, industry experts said.”
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