The U.S. industrial market is on pace for a record leasing volume with activity through July reaching 587 million square feet, 52% more than the same period last year, CBRE reported in September.
CBRE credited higher transportation costs – which are rising faster than rental rates – are said to be fueling this robust leasing activity.
For example, the cost of shipping a 40-foot container by sea from Shanghai to the Port of Los Angeles is up 235% from this time last year, according to Drewry Supply Chain Advisors.
To hedge against future rising costs, companies have expanded domestic warehouse space to reduce the frequency of long-distance shipping. CBRE notes that transportation costs can account for 50% to 70% of a U.S. company’s total logistics spend. At the same time, fixed facility costs, including real estate, comprises only 3% to 6%.
“It takes roughly an 8% increase in fixed facility costs to equate a 1% increase in transportation costs,” said Joe Dunlap, managing director of CBRE’s Supply Chain Advisory. “The increased real estate costs pale in comparison to what they are experiencing with transportation costs. They are calculating that it is better to pay higher rents if they can lower transportation costs with a strategic occupancy plan.”
Warehouse 3PLs benefit because more firms have outsourced distribution and warehousing, he stressed. As a result, 3PLs have leased 121 million square feet of bulk (100,000 square feet and above) industrial space, representing a 31.3% market share. This is nearly double the 66.8 million square feet (24.5%) 3PLs leased in the same period last year.
“Retailers and manufacturers are increasingly reliant on the market expertise of 3PLs to help them navigate significant supply chain challenges,” said John Morris, executive managing director and Americas Industrial & Logistics business leader.