Space constraints: Logistics warehousing rents on the rise

As China’s exports climb back to pre-recession levels, the cost of logistics warehousing is on the rise. Rental prices for warehouse space in Shanghai and Beijing have increased steadily for the last four consecutive quarters as logistics firms saw vacancy rates fall, a trend Andrew Hatherley, executive director of Asia industrial and logistics services for CB Richard Ellis (CBG.NYSE), expects to continue.
 
"Export levels are improving and making a comeback," Hatherley said. "But logistics companies stopped building new warehousing space around October 2008."
 
The halt in construction was a consequence of sluggish trade and frozen capital during the global downturn. Warehousing facilities braced for a sharp rise in vacancies and falling rental rates.
 
The result is that some major cities – most notably Shanghai and Beijing – haven’t seen warehouse supply increase in two years, though demand for international-grade warehouse space is rising.
 
This shortage will continue to drive up rental rates, which Hatherley predicts will rise 20% in the next 12 months.
 
Logistics firms will most likely respond to this surge by building more warehouses, which would, in turn, increase supply and stabilize rents. The problem, however, lies in the time it takes to build international-grade facilities. Even if firms started construction today, the spaces would unlikely be ready for use until a year later.
 
"These firms are getting ready to start a new cycle of development, which makes sense when you look at [current] rents and vacancy rates," Hatherley said.
 
For now, manufacturers and distributors are preparing for rising logistics costs.
 
"We saw an increase last year, and we expect an increase this year as well," said Aline Conus, CEO of E-Luxury Brands, a company that distributes high-end goods in China. "Compared to other countries, [warehousing in] China is much less stable."
 
But there may be a silver lining. The short-term scarcity could spark improvements in companies’ logistics management in China.
 
China’s state-of-the-art warehouse facilities are hindered by outdated business methods, Hatherley said. Manufacturers traditionally prefer shorter contracts, allowing more flexibility and a strategy to find the lowest bidder. But long-term deals could allow firms to use more complex technology systems, decrease costs and to use the warehousing space more effectively.
 
"One way to offset increases in rent is to give logistics firms longer [contracts]," Hatherley said. "The industry needs a shift in mindset."