Adapting to Soaring Warehouse Lease Renewals

Why Warehousing is Becoming More Expensive

As industrial real estate prices remain stubbornly high, warehouse tenants on both the east and west coasts are bracing for significant increases in lease renewal costs. These increases have a direct impact on the cost of warehousing. Many businesses that signed agreements during the pandemic’s surge in demand, are now facing stark financial realities as those contracts expire. During the early stages of the pandemic, intense competition for warehouse space drove lease rates to record highs. Businesses were eager to secure space amid supply chain challenges, often agreeing to terms that locked them into inflated rents. Now, as those three to five-year leases expire, tenants are encountering a market where rental rates have risen even further, driven by a constrained supply of new industrial spaces.

Some tenants renewing agreements face rates two to three times higher than what they paid previously—a sharp contrast to earlier expectations that elevated costs would cool off after the pandemic.

The Role of Market Dynamics

While increased vacancy rates might typically signal declining rents, the industrial real estate market operates differently. Warehouse tenants often sign leases based on long-term operational needs rather than short-term conditions. Developers, meanwhile, have slowed the pace of new construction, further restricting supply. This supply constraint has bolstered rental prices despite higher vacancy rates, leaving many businesses with limited options for cost-effective space.

Opportunities and Challenges for Tenants

While average rents and corresponding warehousing costs remain high, some regions have seen modest declines. Importers and tenants seeking better deals are advised to shop around and comparison price between different regions. Locations that may not be conveniently located near main thoroughfares, might be opportunities for decreased rates. However, these discounts often fall short of significantly easing the financial burden. In addition, while this approach can result in possible long-term savings, the process is not without challenges. Moving inventory, reconfiguring IT systems, and establishing operations in a new location involve significant upfront costs. Also, importers need to be sure that any location that is being considered can properly handle their volume. The worst thing a company can do is move warehouses to save money, only to find that the new location can’t adequately service them, which may cause lost sales when goods don’t get shipped out timely.

LMC is dedicated to staying updated on these developments and advising clients effectively. For more information or questions, please reach out to your LMC professional.