Rising Transportation and Supply Chain Costs Drive Industrial Real Estate Leasing Business

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Recently released data from Los Angeles-based industrial real estate developer CBRE indicated that leasing volume for the U.S. industrial market is on track for a new annual high in 2021, with full activity through July, to 587 million square feet (SF), an annual gain of 52%.

If this level of rental activity continues, CBRE said 2021 would surpass 2020, the current record, at 713.3 million Swiss francs. Additionally, he noted that robust demand, coupled with a national vacancy rate of 4.0%, has driven average rents up 9.7% since August 2020.

The company explained that significantly higher transportation costs, which are rising faster than rental rates, are a driver of increased rental activity. This has translated into what he called robust demand for goods, as well as continued delays at ports, which have resulted in increases of more than 230% to ship a single 40ft container from Shanghai to the port. from New York. /New Jersey and Port of Los Angeles, based on data from Drewry Supply Chain Advisors, according to CBRE.

And he also observed that air transport is still “a much more expensive option”, even in the context of rising shipping costs, with average air freight rates rising 14% per year, according to data from Clive. Data Services.

“CBRE Supply Chain Advisory reports that transportation costs typically make up half of an occupant’s total logistics spend, but can easily reach 70%, while fixed facility costs (including real estate) only make up 3% at 6%,” CBRE said.

And as supply chain costs have risen, CBRE said occupiers want to outsource distribution and warehousing services, with 3PLs leading the pack, having nearly doubled their rental volume since the start of the leasing. year to July, to reach 121 million square feet of bulk industrial space, for a market share of 31.3%.

The first three are completed by: General Retail & Merchandise, at 96 million Swiss francs (24.8% market share), and e-commerce, at 52 million Swiss francs (13.8% market share) .

“Limited availability is a major concern when occupants have an immediate need for space change,” said Joe Dunlap, managing director of CBRE’s Supply Chain Advisory. “However, fixed facility costs (largely related to location, space, NNN (triple rate lease) property rates, type of building, etc.) are not the only concern. trade-off between rising transportation costs and variable facility costs (largely determined by volumes, degree of automation, types of jobs, headcount, productivity rates, wage rates/benefits benefits/taxes, days/hours of operation of the week) are equally or more of a concern, etc.) when compared to fixed installation costs, inventory carrying cost, reverse logistics and other logistical costs Occupants clearly understand that these cost elements individually have increased and have trade-offs.

Dunlap added that occupiers don’t necessarily actively expand national warehouse space unless that tipping point changes in their business and shifts the balance in those trade-offs.

“For example, occupants experiencing dramatic growth might need additional storage space,” he said. “Conversely, those experiencing a contraction in sales may feel the need to reduce storage space. Depending on the situation, occupants going through mergers, acquisitions, or divestitures could see increases or decreases in warehouse space requirements. Companies concerned about business continuity might need to create inventory redundancy and therefore additional warehouse space requirements. And businesses looking to increase customer access speed or specifically transit time may also need to shift warehouse needs. »

On whether 3PLs will continue to aggressively lease large amounts of warehouse space for the foreseeable future, John Morris, executive general manager and head of CBRE’s manufacturing and logistics business for the Americas, said that There are exceptions, but 3PLs generally don’t rent space. independent of a customer contract and the duration of the lease generally coincides with the duration of the customer contract.

“Therefore, 3PLs will not aggressively lease large amounts of warehouse space without corollary customer commitments,” he said. “That said, the 3PL segment has always been the largest occupant segment. Comparing August 2021 to the same period in 2020, 3PLs accounted for approximately 31% of industrial leasing transactions over 100,000 square feet, compared to 24% during the same period of 2020. As companies determine whether to operate the in-house or outsourced warehouse space, many focus on running their business and continue to leverage the deep expertise and value proposition of 3PLs, especially with ever-changing logistics needs, supply chain disruption and changes in their business.

About the Author

Jeff Berman, Group News Editor Jeff Berman is Group News Editor for Logistics management, Modern material handlingand Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine where he covers all aspects of the supply chain, logistics, freight forwarding and material handling industries on a daily basis. Contact Jeff Berman

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