The True Cause of Increasing Industrial Rental Rates
Double-digit rent growth was a large factor in the U.S. industrial market in Q2 2022. While Q3 2022 national figures are just now trickling in, it looks as though robust rent growth will continue to be the trend.
Inflation could be considered one factor. But according to a recent article published by Cushman & Wakefield, vacancy rates, rather than inflation, will continue pushing those rents. Specifically, “ongoing tight market conditions and aggressive competition for space resulted in a 16.5% year-over-year asking rent growth in Q2 2022,” the article said.
But the headlines don’t necessarily discus the whole situation. The Cushman & Wakefield analysts pointed out the difference between asking rents and “taking” rents (or the actual rent agreed upon by the landlord and tenant) can differ. Why? Because asking rents are what the owners hope for, while taking rents reflect what the market will bear. Or, as the Cushman & Wakefield article explains, “asking rents may stay elevated slightly longer even as the market slows because owners aren’t willing to drop the asking price, but they might be willing to offer more concessions which are captured in “taking rent.”
And the spread between these two metrics is widening, with the difference between net taking rates and net asking rates standing at 28.2% by the end of 2021. Taking rents have outpaced asking rents “due to occupiers competing aggressively for more limited space options,” Cushman & Wakefield analysts said. “Thus, this widening was not due solely to 2021 rent growth.” And those spreads could be wider for high-cost markets.
The article indicated that the difference between asking and taking rents is important to tenants, especially as it seems to be a landlord’s market. “Some landlords will just mark an available building ‘subject-to-offer’ or ‘negotiable’ instead of quoting an asking rent,” the Cushman & Wakefield analysts said. Under these conditions, landlords can suggest any rent rate.
Investors also need to pay attention to this difference, as it can impact total returns, net operating income and exit cap rate assumptions and strategies. For example, higher NOI growth potential could mean a higher valuation and potentially higher sales price, even if cap rates stay the same.
The article concludes with the idea that in-depth understanding of rent dynamics is important, especially in a period of rising inflation and interest rates. “This analysis has revealed that the incredible nuance to rent planning necessitates vigilance and thought when looking for real estate,” the article’s authors said.
I love content. I love writing it, visualizing it, and manipulating it to fit into different formats. I have years of experience in working with content, both as creator and editor. The content I create and edit provides assistance with many goals, ranging from lead generation, to developing street cred through well-timed thought-leadership pieces. Content skills include, but aren't limited to, articles and blogs, e-mails, promotional collateral, infographics, e-books and white papers, website copy and more.
CRE courses for CE credits
Get CE course credits, centered around all things CRE. View our courses today!