June 7, 2018
Projected rents are more than adequate in many markets, including Los Angeles, to justify additional development of warehouses and distribution centers, according to a new report from Los Angeles-based CBRE. Rising construction costs have not curtailed new warehouse development, even as the land cost component has climbed to more than half of a project’s total outlay in places such as Los Angeles and the Inland Empire.
In 10 major markets CBRE examined, in the gap between pro forma rents and breakeven rents, the former exceeded the latter by 20 to 40 percent.
CBRE’s David Egan says, “This huge gap implies that if demand slows and the market cools a bit, there’s still a lot of cushion there. This means that the development market is quite healthy, underwriting remains conservative, projects under development should perform quite well and the incentive is there for continued development.”
The largest rent spreads CBRE notes were in Chicago (43%), Atlanta (38%), Phoenix (35%), Pennsylvania’s I-78/I-81 corridor (30%) and Los Angeles (27%).
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