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!