If your landlord has some rent growth projection on their mind, renewing now may cost you. And with the current steam of online retailing, industrial doesn’t necessarily show signs of slowing down. Industrial space is a hot investment right now and this means that a lot of developers want in on the action.

“E-commerce will likely serve as a tailwind for the logistics industry—and industrial warehouse and distribution properties—for at least 10 years,” according to Victor Calanog, Head of Commercial Real Estate Economics at Moody’s Analytics.

So, does this mean that the time to strike and renew now before costs go up even more? Well, there’s more to the discussion including the glaring fact that most warehouse leases are longer than office leases. But this doesn’t necessarily mean you couldn’t approach your landlord to renegotiate before your expiration date. Read: How to Negotiate Your Warehouse Lease in a Tight Market. 

Some factors that are going to be first-and-foremost when identifying your leverage in negotiating a renewal (or any warehouse lease) include:

• Supply and demand
• What market you’re in geographically
• Age of your warehouse vs average age of warehouses around you
• The creditworthiness of your tenancy
• How much construction is in the pipeline
• When construction is expected to hit the market
• How much time is on your lease
• How much longer you want your lease to be
  

Let’s discuss the main points and how they’ll influence your competition factor and overall leverage. 

In the first quarter of 2023, there was a slight dip in leasing volume. Not really enough to make landlords scurry for tenants like in the office sphere, but still worth mentioning to understand the full dynamics.

Based on initial data, the leasing activity in the first quarter of 2023 has experienced a decline of 16.3% compared to the preceding quarter. Additionally, there has been a slight uptick of 40 basis points in the vacancy rates from the previous quarter, but with a current vacancy rate of 3.8%, landlords aren’t worried yet. 

New Construction Projects Coming Due

Now compound this slowdown with the fact that hundreds of millions of square feet are about to hit the market this year. According to industry reports, there is currently an impressive 620.5 million square feet of warehouse space under construction nationwide.

By the end of 2023, almost 90% of the ongoing construction projects are expected to be completed and available on the market. This influx of new warehouse inventory will have a profound impact on the commercial real estate landscape, providing tenants with an abundance of options to choose from. And any degree of over-saturation puts tenants in a more favorable position.

And these new developments have already started hitting the market.

This means that an overwhelming percentage of the leasing activity is for ultra-modern facilities just finished construction.

Demand for Class A Properties Only

This proves that tenants want premium properties. This goes especially for industrial tenants who have to keep up with industry behemoths that have introduced a new standard warehousing efficiency in the internet age.

Given their emphasis on efficiency, advanced technology, and the strategic benefits of location, businesses are increasingly inclined to invest in buildings that already fulfill these requirements, rather than allocating resources towards renovating and upgrading existing facilities.

Class A properties, renowned for their contemporary amenities, cutting-edge technology, and strategic locations, continue to be the most sought-after and frequently leased category, representing a significant 68.5% of the total signed industrial leases in Q1 of 2023.

This emphasis on Class A properties has had a direct effect on average rental rates in the market. As anticipated, the average asking rates for leased warehouse spaces have experienced a notable increase because while there has been a dip in overall leasing activity, the higher concentration of leases being signed for Class A properties has driven up the average rental prices observed in the market.

Consequently, this focus on premium properties has also led to a relative devaluation of other warehouse classes, such as Class B and Class C properties. The increasing demand for Class A spaces has created a disparity in rental rates between different property classes, further highlighting the preference for modern, high-quality warehouse facilities.

So, what does this all mean?

What Industrial Tenants Should Know

The emphasis on premium properties, dip in leasing activity, and expected market over-saturation create quite a favorable environment for industrial tenants. Even though at first glance of rising rental rates, it would spell trouble for the tenant’s position, the full dynamics tell a different story.

There’s not rent growth for all of industrial, just the freshly modern, Class A facilities. That means if your warehouse wasn’t updated in the last few years, you can use this fact as leverage. If your warehouse doesn’t have any features, you can negotiate for them in exchange for a longer-term lease.

Because if your warehouse landlord loses your tenancy, they will need to fund a costly upgrade. Not to mention that this upgrade will probably involve cycling in carbon-neutral technology because in coming years, laws are cracking down on emissions from commercial buildings. Learn how this influences your position and budget as a tenant in, How Will New Green Legislations Affect Commercial Tenants?

If you prove that there are other alternatives better suited for your business, they may be incentivized to work with you. Because your tenancy removes the guess factor from your landlord’s budgeting.

If they get specific with costs and responsibilities expected of you, they don’t need to deal with the cost of an expensive redesign to stay up to date with the type of buildings in demand. All this is before they invest in marketing the space, courting tenants, and negotiating factors with them.

So, they may be willing to renegotiate rent rates or escalation, discuss a new and improved tenant improvement allowance or other concessions.

Leverage Your Value as an Industrial Tenant

There’s a lot of pressure on industrial tenants right now but rising rents are likely to flatten out. Rents will likely pause increasing or slow until: 

1. The market absorbs new space
2. Interest rates drop precipitously 

Currently developers aren’t motivated to invest in speculative developments with interest rates at this level. So in the mean time, as the freshly developed space is absorbed by the market the rent growth is expected to dramatically cool done in relation to the increased supply. This cycle will likely continue as developers spool up again to get new shovels in the ground when demand returns. 

Over-saturation combined with a potential economic slowdown will likely increase vacancy rates. But this is good news for prospective warehouse tenants. 

Not only this, but there are a number of factors that put tenants in a more favorable position than landlords would like them to realize.

And despite a predicted dip in rent prices, the overall market still shows consistent promise. Industrial landlords aren’t struggling like in the office sector, and therefore might actually be able to fund the promises they make to get new tenants!

Considering these factors, industrial tenants should carefully evaluate their current situation and weigh the advantages and disadvantages of renewing their warehouse leases. While rising rents may appear challenging, the over-saturation in the market and the preference for premium properties can present opportunities for tenants to negotiate favorable terms. By leveraging their position, tenants can potentially secure rent rates, lease terms, and concessions that align with their needs and budget.

If you’re looking for a new warehouse lease or want to be as prepared as possible to negotiate a lease renewal, you’ll want to learn all the factors involved in finding your best warehouse space for the best terms and price possible. Enroll in the free course to get ahead.