Report: Industrial Rent Premiums Rise as Logistics Firms Look to Air Freight to Solve Supply Chain Issues

CBRE, Los Angeles, Inland Empire, Oakland, Ontario Airport, Oakland International Airport, LAX, Ever Given
Courtesy of CBRE

By Meghan Hall

It is no secret that asking rates for industrial real estate in core markets have increased, driven by the demands of e-commerce, logistics and distribution firms. However, the past year has disrupted supply chains in ways that have forced these companies to re-evaluate just how they plan to bring their products to market. While ocean freight maintains its popularity, industrial assets near airports are garnering significant rent premiums. Recent data released by CBRE indicates that those rent premiums average 13 percent across top U.S. airport submarkets.

“As ecommerce providers and retailers compete to offer faster delivery times, air freight will increasingly be a key component of distribution strategy,” said John Morris, executive managing director and leader of CBRE’s Americas Industrial & Logistics business. “Rent for warehouses and distribution centers around major air cargo hubs should continue to rise, especially in markets where there is limited development space. Customers today expect fast delivery, but there is a cost associated with leveraging air transportation for e-commerce delivery.”

Rent premiums for industrial assets within airport submarkets have been driven by a number of factors. Kevin Hatcher, senior vice president with CBRE Industrial & Logistics in Oakland, noted that in recent weeks, events such as Ever Given’s entrapment within the Suez Canal, as well as multi-week backups at major ports, including Los Angeles, Oakland and Long Beach, have companies evaluating how to smooth out supply chains. For those insistent on providing the fastest delivery to customers possible, air freight has become an increasingly appealing option.

“I think a lot of folks have revisited air cargo as a way to get their on-demand goods to market as quickly as possible,” explained Hatcher. “…There is certainly a cost premium to air freight versus ocean freight. But I think with the backups, if [companies] need something here right away, they must consider air freight.”

Third-party logistics firms are the biggest drivers of leasing in airport submarkets, accounting for 29.6 percent of activity. General retail and wholesale users make up 24.4 percent of the market, followed by pure play, e-commerce only companies, who make up for about 16 percent of market activity. Food and beverage companies account for 12.5 percent of airport leasing activity—four percentage points higher than their share of U.S industrial and leasing activity overall.

California markets, including Oakland, Los Angeles County and the Inland Empire, command some of the highest overall rent premiums in the country. The Oakland submarket commands a 32 percent rent premium—the second highest in the country only behind Chicago, which sees rent premiums of 47.1 percent.

In Oakland, the airport submarket accounts for about 21.2 percent of Oakland’s overall industrial market. In the wider Oakland market, first-year taking rent comes in at $10.36 per square foot, per year, triple net.  Near the airport, those rents jump to $13.68 per square foot, per year, triple net.

At the end of the day, Oakland’s sky-high rental prices are the result of a factor that always colors Bay Area commercial real estate: demand outweighs supply.

“Oakland Airport is an infill airport, meaning that it is close to population centers; it’s not 30 miles out of town,” said Hatcher. “…Certainly, the airport has huge gravitational pull.”

Oakland International Airport’s proximity to other transportations, such as the Port of Oakland, and dense urban cores like San Francisco, make it attractive to companies looking to make the most of their Bay Area real estate. Industrial product near the airport also tends to be lower coverage warehouses, which equates to parking. Such parking is pivotal for distributors, who will pay premiums for the ability to store their vehicles. 

As development continues to occur and developers produce new projects, they are also continuing to build to tenant needs. Instead of maxing out the development potential of a property, developers will instead construct a project that results in less site coverage and more parking, depending on the tenant in tow. Landlords, still looking to be compensated for the price of land and construction, are in turn increasing rents to get projects to pencil.

“They want to make sure they are compensated the same if they maxed out coverage,” said Hatcher. “…We’re very land constrained, so you can’t just build a bunch of warehouses to make up for demand like you can near the Inland Empire. The Inland Empire is the largest market in the country and why? They have a lot of land to build on.”

Currently, the Inland Empire has about 30 million square feet of industrial space under construction. The Ontario Airport submarket accounts for about 19 percent of the Inland Empire’s industrial market and sees rent premiums of about 12.2 percent.

Los Angeles, with many of the same fundamentals due to a constrained supply of land and its proximity to consumers also sees a rent premium. The South Bay submarket accounts for 23.1 percent of total Los Angeles industrial product, with the submarket’s premium coming in at 12.9 percent. There, industrial rents sit at about $11.73 per square foot, per year, triple net.

Such submarkets are expected to maintain their strong position in the future as e-commerce continues to grow and logistics providers consider not just how to expedite shipping, but navigate new supply chain challenges posed by world events.

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