Projected rents are more than adequate in many markets to justify additional development of warehouses and distribution centers, according to a new report from CBRE. Furthermore, Phoenix is positioned as a top market for this activity.
CBRE analyzed the gap between pro forma rents in various markets – the rental rates that developers can reasonably expect to obtain on newly built warehouses – and breakeven rents, which are the rents they’d need to cover overall development costs. In the 10 major markets that CBRE examined, the former exceeded the latter by 20 to 40 percent.
CBRE’s analysis found the largest rent spreads in Chicago (43 percent), Atlanta (38 percent), Phoenix (35 percent), Pennsylvania’s I-78/I-81 corridor (30 percent) and Los Angeles (27 percent).
“In Metro Phoenix, demand is currently outpacing supply at a healthy rate and therefore, we are not concerned about an oversupply of building,” said CBRE’s Pat Feeney. “We expect this trend to continue because of recent upward pressure on interest rates.”
“This huge gap implies that if demand slows and the market cools a bit, there’s still a lot of cushion there,” said David Egan, CBRE Global Head of Industrial & Logistics Research. “This means that the development market is quite healthy, underwriting remains conservative, projects under development should preform quite well and the incentive is there for continued development.”
These spreads also confirm that the current market for Industrial & Logistics real estate has growth remaining. Typically, a sign of waning momentum for a market comes when spreads between pro forma and breakeven rents narrow or vanish.
Feeney adds, “While e-commerce is contributing to a portion of the positive activity, metro Phoenix is experiencing increases in demand for manufacturing space, food-related uses, pharmaceutical and 3 PL’s. Additionally, Phoenix remains attractive for its affordability, availability of labor, population growth and infrastructure.”
To view the report, click here.
