Projected rents are more than adequate in many markets to justify additional development of warehouses and distribution centers, according to the commercial real estate services firm CBRE.
CBRE analyzed the gap between pro forma rents in various markets – the rental rates that developers can reasonably expect to obtain on newly-built warehouses – and what they term breakeven rents, which are the rents they would need to cover overall development costs.
In the 10 major markets that CBRE examined, the former exceeded the latter by 20 to 40%. “This huge gap implies that if demand slows and the market cools a bit, there’s still a lot of cushion there,” says David Egan, CBRE global head of industrial & logistics research.
“This means that the development market is quite healthy, underwriting remains conservative, projects under development should preform quite well and the incentive is there for continued development.”
These rent spreads also confirm that the current market for industrial and logistics real estate has growth remaining, the company observes, noting that a typical sign of waning momentum for a market comes when spreads between pro forma and breakeven rents narrow or vanish.
CBRE’s analysis found the largest rent spreads in Chicago (43%), Atlanta (38%), Phoenix (35%), Pennsylvania’s I-78/I-81 corridor (30%) and in Los Angeles (27%).
“These findings, much like other recent CBRE research reports, underscore that the industrial and logistics real estate market is undergoing a structural change due to demand tied to ecommerce,” says Adam Mullen, the company’s. Americas leader for industrial & logistics.
“Many baselines in this industry are being redefined because of this fundamental change in the way we purchase and receive many goods,” he adds. “Anticipating this market’s trajectory requires vigilant monitoring and analysis of indicators such as these rent spreads.”