Warehouse Rent Growth ‘As Good As It Gets’ in Second Quarter

Rents in a handful of top warehouse distribution markets posted year-over-year rent gains of 5% or more in the second quarter, virtually unheard of in the staid property sector more accustomed to 1.3% annual rental rate growth.

For the U.S. warehouse market as a whole, the average asking net rent rose to $4.75 per square foot, a 2.1% increase from one year ago. The upward trend in rents was boosted by 37.3 million square feet of positive net absorption during the quarter, the second largest quarterly absorption since the recovery started, and reflected continued steady demand from warehouse-distribution tenants at a time when very little new space is being added by developers.

“I think we can finally say that rent growth is back,” said Rene Circ, director of industrial research for CoStar’s Property and Portfolio Research (PPR), who with Senior Economist Shaw Lupton, this week presented CoStar’s Midyear 2013 Industrial Review and Outlook. The full presentation is available to subscribers at www.costar.com.

“While we have seen some previous rent growth in terms of diminishing free rent and concessions, now landlords in a larger number of markets have begun raising actual asking rents,” added Circ. “And it’s a good cross section with 142 of the 210 submarkets we track seeing rent increases during the quarter. We’re seeing very good rent growth across the board.”

A handful of major warehouse distribution markets have seen rents rise more than 5% over the past year. Orange County, CA, Indianapolis, South Florida and Edison, NJ all posted annual rent gains above 5%. California’s Inland Empire and Dallas-Fort Worth each had 6.1% in annual rent growth and Portland saw a staggering 7.8% increase.

“These are epic rent numbers for the industrial property sector, and go a long way towards offsetting the drop in rents we saw during the recession,” noted Lupton. “While industrial rents this year are still down about 8% for leases signed five years ago that are rolling to current market rates, in markets such as Portland, the rent is essentially flat for leases that are rolling over.”

While some of the markets seeing strong rent growth are supply-constrained, others are not. “The virtual shut-down in construction has served as a great equalizer among markets at this point in the cycle where supply hasn’t caught up with demand,” added Lupton. “We’re seeing strong rent growth in markets that typically don’t see big pops in rent.”

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