Growing Warehouse Distribution Development is Justified Due to Demand, Says Report

Warehouse and distribution space is expanding rapidly in the U.S. due to strong demand. According to a new report by the CBRE Group, a global investment firm located in Los Angeles, pro forma rents exceeded breakeven rents by 20-40%.

New warehouse development has not been hindered by the spike in construction costs, mostly because the supply of modern logistics facilities is limited. The majority of construction costs is represented by land acquisition; today, land costs range between $45-to-$170 per square foot.

The most expensive part of the country to build a 500,000 square-foot warehouse is Los Angeles, followed by Inland Empire, California; central New Jersey; Portland, Oregon; Pennsylvania’s I-78/81 corridor; Houston, Texas; Chicago, Illinois; Phoenix, Arizona; Dallas/Fort Worth; and Atlanta, Georgia.

The biggest boom right now is in Atlanta, Dallas/Fort Worth, and Inland Empire. However, the greatest rent spread between pro forma rents and breakeven rents is: Chicago at 43%; Atlanta at 38%; Phoenix at 35%; Pennsylvania’s I-78/I-81 corridor at 30%; and Los Angeles at 27%.

David Egan, CBRE’s global head of industrial and logistics research, said that the traditional perception that oversupply will threaten the market is wrong. Instead, he said “there is a very big spread between kind of the bottom line breakeven and the pro forma rents” which “means the market will generally absorb what the developers need.

“The economics are on the side of the developers, and there is a good case to be made for the developers to continue to build. Things are not getting overheated, and if the market does soften a bit, there is a cushion to move the rents a bit and still make money. There is good economic reason for development,” he said.

How have you expanded your warehouse and distribution space over the last few years? If you haven’t, do you have plans in the future? If so, what are factors that have led you to expand? Please let us know in the comments below!

Frequently Asked Questions

What factors are driving the increased demand for warehouse space?

The article doesn’t specify the exact drivers, but the surge in warehouse demand is likely fueled by e-commerce growth, supply chain reshoring, and companies needing more inventory storage space. The COVID-19 pandemic accelerated online shopping trends, requiring retailers to expand their distribution networks. Additionally, businesses are diversifying their supply chains and holding more safety stock, increasing warehouse space requirements nationwide.

How much does it typically cost to build a warehouse?

Land acquisition represents the majority of warehouse construction costs, ranging from $45 to $170 per square foot. Total construction costs vary significantly by location, with Los Angeles being the most expensive market. The article notes that despite rising construction costs, development remains profitable due to strong rent premiums and limited supply of modern logistics facilities.

Why are developers continuing to build despite high construction costs?

Developers continue building because pro forma rents exceed breakeven costs by 20-40%, creating substantial profit margins. The limited supply of modern logistics facilities supports strong rental demand. CBRE experts indicate this rent spread provides a financial cushion, allowing developers to adjust pricing if markets soften while still maintaining profitability, making continued development economically justified.

Which markets offer the best investment opportunities for warehouse development?

Chicago offers the highest rent spread at 43%, followed by Atlanta at 38% and Phoenix at 35%. While Atlanta, Dallas/Fort Worth, and Inland Empire show the biggest construction booms, Chicago’s superior rent margins suggest stronger investment returns. Pennsylvania’s I-78/81 corridor also shows promising 30% spreads, indicating multiple markets offer attractive development opportunities.

What makes modern logistics facilities different from older warehouse space?

While the article doesn’t detail specific features, modern logistics facilities typically offer higher ceilings, advanced automation capabilities, better loading dock configurations, and strategic locations near transportation hubs. The limited supply of these modern facilities mentioned in the report suggests they command premium rents due to operational efficiencies that older warehouses cannot provide to today’s distribution requirements.