A Simple Case of Supply and Demand for Industrial

Prologis reports increasing rents and decreasing new construction.

HOUSTON—As vacancy rates decline nationwide, warehouse and distribution center owner, Prologis, recently reported increasing rents and less new construction, despite demand for warehouse space. According to CoStar statistics for the first quarter of 2016, the vacancy rate for warehouse space was 5.9%, slightly down from 6% in the fourth quarter of 2015. As the supply of real estate for distribution centers decreases, the quoted rental rate for warehouse space rises. The national average quoted rental rate for leased warehouse space is $5.51 per square foot, an increase of about 2.23% from the end of 2015.

The tightening rental market for distribution centers is impacting site searches for new distribution and light manufacturing operations. If project timelines allow, more companies are considering build-to-suit options in addition to existing buildings to ensure that the lack of real estate availability is not leading to a poor site selection decision. In markets such as Los Angeles, where the vacancy rate is 2.4%, the right building may be proposed and waiting for a tenant before construction can happen. There are also several development-ready sites throughout the country that may be just as ready to serve a distribution center’s requirements.