Demand for real estate is soaring as companies like Amazon and other e-commerce retailers are looking to set up distribution centers or facilities closer to the communities they are serving. This helps the supply chain cycle by reducing the time (and final mile costs) to get goods into the hands of customers, but also comes with the cost of driving up lease rates per square foot. We take a look at what is happening in commercial real estate and what this means in our blog this week.
With industrial warehouse vacancies at a 17-year low, rents are skyrocketing for both inland distribution centers in Middle America and port-side warehousing. In areas surrounding the Port of New York / New Jersey, where expanding and building aren’t possible, the average rent is 36% higher now than in 2010 when the recession bottomed out. The rent for prime warehouse spaces in New Jersey rose 15% just last year while space in Southern California’s Inland Empire saw a 13.5% price hike; Los Angeles and Orange County are up 9.8% regardless of port proximity.
It’s not just the port areas feeling this pinch. Dallas/Ft. Worth warehouse prices rose 8% while Atlanta saw a 6.8% jump. Within the first three months of 2017, developers began construction on more speculative warehouse projects than in any other quarter in over twenty years as demand reached triple the city’s available supply. Distribution tenants in Houston leased over 6.5 million square feet of space since 2015 even as rates rose 20% within the same time. Interestingly, in Houston, of the 27 new industrial facilities built in 2016, 25 were dedicated distribution centers for consumer goods.
A June report from CNBC discusses the conversion of retail sales from brick and mortar shopping malls to e-commerce distribution centers. While the retail sector hasn’t lost any steam, though many stores are closing their doors, the transition to e-commerce is causing a shift from the prime locations where shopping malls once reigned to the convenient warehouse distribution hubs that Amazon has been creating.
An important note on the Amazon factor is their early entry into the distribution market and how many retailers, regardless of their original business model, have only just started following the e-commerce plan. This means that their growth, alongside the continued growth of Amazon and other e-tailers who desperately need more and more warehouse space, will not slow down or see a price drop anytime soon.