Inflation Pressure Hits New Warehouse Leases

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Landlords are incorporating higher prices into increasingly expensive contracts, driving up costs across supply chains.

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As per a report by real estate firm CBRE Group, leasing prices of industrial properties are on average 25% higher at the end of five-year contracts that ended this year. Inc.

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Released on Monday. The growth, which comes as strong consumer demand and growth in the e-commerce business have created a rush at the distribution space, extending higher supply-chain costs for customers who had long-term contracts that allowed them to Growing warehouses saved from expenses.

“We don’t see any reduction in demand for industrial space,” said John Morris, head of industrial and logistics at CBRE. The company has never seen growth this high.

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CBRE said in an earlier report that the US national average vacancy rate fell to 3.6% in the third quarter, from 4.3% a year earlier, and the lowest level in the data going back to 2002. Space is particularly tight in major distribution centers such as the Inland Empire in Southern California, where the vacancy rate has recently dropped to 0.7%.

CBRE says leasing rates grew 10.4% year-on-year in the third quarter. With many leases now expiring, the new CBRE report suggests that landlords are looking for a big hike from tenants who signed multiyear leases before the pandemic sent industrial real estate demand into overdrive.

The rate increases, which CBRE said during the third quarter of this year, have been strengthened in areas with higher demand than long-term contracts for renewal. Fares to replace leases expiring this year in central New Jersey, Philadelphia and the Inland Empire near the ports of Los Angeles and Long Beach were 60% higher than rates for leases that began in 2016.

Shippers are adapting to the rising cost of warehouse space near population centers so they can serve goods-hungry consumers, said Brent Moritz, an associate professor of supply-chain management at Penn State University’s Smile College of Business. Hope for fast delivery.

The higher cost of servicing those customers “will not be temporary as long as consumer demand remains strong,” he said.

Rising warehouse rental rates are part of a broader increase in costs across supply chains, from raw material prices to shipping freight charges. Transportation companies that have been gaining high rates in the region’s spot markets over the past year are now looking to embed pricing in the longer-term contracts they are negotiating with shippers.

Ocean container rates in contracts longer than 88 days rose 16.3% in November and were up 121.2% from contract rates set a year ago, according to freight market data provider Zeneta.

CBRE’s Mr Morris said warehousing typically accounts for 4% to 6% of a company’s total logistics costs, and is much higher than labor and transportation expenses. “But strategically, there is very little an occupier can do” to cut spending for warehouses, he said, “when their business depends on them.”

Many retailers and manufacturers are passing on increased supply-chain costs to their customers, helped by fuel inflation that hit a three-decade high in October.

Officials who have said rising prices were probably a result of the transient impact of supply constraints related to the pandemic are now reconsidering valuations. US Federal Reserve Chairman Jerome Powell told lawmakers last week that the central bank may have miscalculated how long inflation will last and it is time to retire the word “transient” when describing rising prices.

Lydia O’Neal at [email protected]

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