Rapidly Rising Residual Rental Rates

Industrial rental rates have skyrocketed in urban areas due to the boom of e-commerce. The demand for third-party logistics, also known as 3PLs have increased substantially. This has driven up rental rates in the industrial market. The industrial market in New Jersey alone has increased 11% year over year. The question of sustainability of rental increases emerges.

In the current market, logistical facilities must be operating at medium levels of automation to be successful. Facilities with low levels of automation are slow and error-prone. E-commerce sellers are realizing this and shifting towards 3PLs with more automation. 3PLs that are operating with medium levels of automation can have costs that exceed well over $1M. That being said, when evaluating rents as a percentage of expenses, the rise from $4PSF to $10PSF is only a small percentage increase in total operating costs. Although rents can more than double in as little as a 3-year lease period, the effect on the bottom line for medium-size facilities is not detrimental.

While industrial rental rates are escalating quickly, we are not at the point at which a rental cap is necessary. Nor do industrial rental rates impact the economy as much as residential rental rates. The California State Assembly has passed a proposal that would prohibit residential landlords from raising the rent each year by more than seven (7%) percent, plus the annual increase in the cost of living. These policies are necessary for residential markets because they have a stronger impact on the economy as a whole. Housing is often the largest expense an individual has, and lack of affordable housing has adverse social ramifications.