By Lee Ehlers, CCIM
Vacancies in industrial buildings are as low as we have seen them in many years. Clients and others have asked us why builders and developers are not building to increase the inventory.
That is what you would expect with a normal supply and demand market. We think one reason is, the numbers don’t work. Another reason is, there isn’t a ready supply of industrial lots available for builders.
Current rents for newer, multi-tenant industrial warehouse spaces are in the range of $4.50 to $5.50 per square foot. Builders tell us the cost to construct a new building is in the range of $75 to $90 per square foot, depending on land cost, type of construction, ceiling heights, etc. With cap rates around 8 percent, rents need to be in the range of $6.50 to $7.50 per square foot to support building new spaces.
The big question is, will the market support this increased level of rent? We believe at some point it will. Now, however, when we talk to potential tenants about rents for space in new, build-to-suit buildings, potential tenants are reluctant to make the commitment, and look elsewhere for suitable existing space.
Ultimately, with overall cost increases and new clean water regulations to deal with, we think rents are bound to rise. It’s just not clear how soon industrial businesses will be willing to pay these costs.