Why Rents May Increase Due to Rising Transportation Costs
It would be hard to miss the fact that everything is getting more expensive. Whether it’s filling up your gas tank or buying deli meat, prices have noticeably skyrocketed. While you may not think of it at first glance, these increasing prices can be partially attributed to rising transportation costs. After all, getting an item from one place to another has gotten increasingly difficult during the COVID-19 pandemic. But these disruptions in the supply chain can have dramatic effects on other industries, as well. There is a significant lack of new warehouse availability, and because of the high demand, it is possible that we’ll see a 10 to 20 percent surge on rents in the next 6 to 18 months. Here’s why that could happen:
Rapidly Rising Costs
From consumer items to necessities for construction, the pandemic has made accessing the things we need more difficult and more expensive. For Instance, Procter & Gamble, who produce everything from diapers to toothpaste, announced last week that it would be increasing its prices as higher commodity and freight costs are set to negatively affect its profits, the Economic Times reported. These same price increases are happening across industries, and that includes manufacturing and construction. With closed ports, worker shortages, and bad weather, shipping has become increasingly complicated and expensive. The rising transportation costs for manufacturing and distributing companies can now account for 60 to 75% of their logistical spending, compared to their fixed real estate costs accounting for only 5 to 10%.
The Need for Space
Industrial space is hard to find. At the beginning of October, the Logistics Managers Index released its monthly survey that measures warehouse demand, and found that warehouses nationwide are filling up quickly. In some markets, warehouse NNN rents are exceeding $10 per square feet, an increase on average of 24.3% across prime submarkets, according to GlobeSt.com. Companies are focusing on leasing more warehouse space rather than paying for the transportation costs. However, finding that warehouse availability has never been more difficult. As a result, it’s even more expensive. Add in freight delays, and the demand for warehouse space is even higher.
Looking Toward the Future
Because of the rapidly rising costs and lack of warehouse space, it’s likely that future industrial rents will increase, and industrial flex space will maintain the same low vacancy rates. With no new warehouse availability despite incredibly high demand, it’s possible that we will see a 10 to 20 percent surge on rents in the next 6 to 18 months. This could have a significant effect on the Boston area.
The reopening of the global economy created a tremendous amount of demand for supplies. Now, we’re dealing with the effects of this increased demand. Cresa’s industrial team takes a comprehensive approach to supply chain management by providing a full range of integrated services that can help your organization create a real estate strategy that will thrive.