Report: Increased Transportation Costs Lead to Record High Industrial Demand Across the U.S.

CBRE, Inland Empire, Atlanta, Dallas-Fort Worth, Chicago, Phoenix, Las Vegas, Salt Lake City, Nashville, Columbus, Louisville, Austin
Courtesy of Henning Wetzel

By Catherine Sweeney 

Industrial leasing activity across the U.S. has been soaring to new records as a result of supply chain backlogs and the growth of e-commerce. However, a recent report from CBRE showed that there may be an additional reason for the increased industrial demand. According to the report, titled “Rising Transportation Costs Help Fuel Record Warehouse Leasing Pace,” the growth in activity is also due largely to an increase in transportation costs, creating an even larger need for industrial product. 

“U.S. industrial demand has broken records because the U.S. consumer has changed permanently. A major reason for this is e-commerce. Online sales have been increasing the past decade, correlating with positive industrial fundamentals,” James Breeze, Global Head of Industrial & Logistics Research at CBRE, said. “…The pandemic created a permanent new online shopping base. Companies need to store more inventory in more locations to ensure product is stocked and transportation costs, which is the most expensive supply chain cost by far, are as low as possible. To do this, more distribution centers are needed.”

According to the report, the U.S. industrial market hit a new record high in leasing volume with activity reaching 587 million square feet as of July. This is approximately 52 percent more than at the same time last year, when nationwide industrial leasing activity reached 382 million square feet. 

At the same time, transportation costs continue to rise, accounting for 50 to 70 percent of a company’s total logistics spending in the U.S. Fixed facility costs, however, only make up for three to six percent of total spending, according to the report. For instance, the cost to ship from Shanghai to the Port of Los Angeles is $11,362, which is approximately 235 percent higher than the same time last year. 

However, the most expensive transportation costs come from shipping via air. According to CBRE, the average rate for international air cargo has increased 14 percent in the past year.  Domestic shipping also has increased 43.1 percent since July of 2020. 

“Transportation costs can make up around 50% of a typical industrial occupier’s supply chain costs, while fixed facility costs, which includes rents, is typically less than 10 percent,” Breeze said. “Transportation costs are skyrocketing due to increased demand and decreased supply of product and labor. Despite record rental rate gains, many occupiers are saving money by leasing more warehouses to hold more inventory and lower transportation times.”

In an effort to combat rising transportation costs, the report showed companies are continuing to occupy more space as a means to cut down on long-distance shipping. This has caused the national vacancy rate to decrease to just four percent. Because of this, the average U.S. rental rate for industrial product has increased by 9.7 percent since August of 2020. Despite this, transportation costs continue to grow at a much faster rate, which, in turn, increases nationwide demand. 

According to Breeze, prime industrial markets like the Inland Empire, Atlanta, Dallas-Fort Worth, Chicago and the New Jersey/Pennsylvania region continue to see the highest level of leasing activity. However, as vacancy dips lower in these markets, occupiers are also expanding near logistics hubs like Phoenix, Las Vegas, Salt Lake City, Nashville, Louisville, Austin, and California’s Central Valley.  

The report also showed third-party logistics (3PL) providers have been the most active occupier type across all U.S. markets in 2021, accounting for 121 million square feet or year to 121 million square feet of industrial space, or 31 percent of the total market share. According to the report, third-party logistics providers were followed closely behind by retail and e-commerce only providers, which account for 24.8 and 13.5 percent of the total market share, respectively.

As transportation costs are likely to continue rising, CBRE predicts demand in the industrial sector is unlikely to slow down. Over the next several years, the U.S. industrial market is expected to see even higher rental rate growth paired with low vacancy and strong leasing activity overall. 

“2021 has already broken the record for most leasing activity in a year, rents are growing at an all-time record, the overall vacancy rate is the lowest on record, and there is more product under construction than at any time,” Breeze said. 

Breeze continued, adding, “There is nothing on the horizon that will stop the current pace of activity through 2022. Many occupiers remain in the early innings of their expansion needs, whether it be to store more inventory, save transportation costs or service a growing consumer base.”