With the Omicron variant appearing to have crested in California, 2022 is poised to usher an era of change. But the economic fallout of the pandemic threatens to linger — especially in the commercial market.

Thanks to out-of-control inflation, sticker shock has become an all-too-familiar feeling since the start of the COVID-19 pandemic. The annual U.S. inflation rate was a staggering 7% as of December 2021, according to the Bureau of Labor Statistics. For perspective, the Federal Reserve’s (Fed) target rate is just 2%.

Inflation has permeated every facet of American life, from grocery stores to car dealerships — and real estate is no exception. Real estate professionals serving clients with commercial property are now grappling with this issue in their practice as well in the form of skyrocketing rent prices.

Over the past 5 years, rent for warehouse space has increased:

  • 7% in the Inland Empire;
  • 9% in Sacramento;
  • 6% in Orange County;
  • 6% in Central Valley;
  • 4% in Oakland;
  • 6% in Walnut Creek; and
  • 33% in the city of Los Angeles, according to Costar.

Warehouse storage space remains stubbornly scarce going into 2022, sending rent prices through the roof. In April, contractors reported that 40% of their commercial and institutional projects were delayed, according to Dodge Data & Analytics. America’s booming e-commerce sector continues to enjoy explosive growth, fueling this scarcity.

Why are prices climbing? It all boils down to limited space, construction and materials. Space is limited because new construction of warehouses is at an all-time low. The industrial vacancy rate dropped to an unheard of 3.6% in Q3 of 2021, according to the Coldwell Banker Richard Ellis  (CBRE) Group. Historically, a 15% vacancy rate has reflected a healthy supply chain.

Construction is also limited because materials and transportation resources have become expensive to purchase and transport due to COVID restrictions. Between August 2019 and August 2021, prices have jumped:

  • 2% for steel mill products;
  • 121% for lumber;
  • 140% for plywood;
  • 201% for diesel fuel; and
  • 101% for copper wire, according to a Fixr survey of construction professionals.

Scarce construction follows scarce labor

Aside from building materials, another vital component of construction is also critically low: labor. The construction industry lost more than 1 million workers during the pandemic, according to CNN. But a dearth of construction labor isn’t the only major factor contributing to California’s building shortage.

Truck drivers are yet another missing ace in the house of cards that is America’s supply chain. In fact, the country suffered a shortage of over 80,000 truck drivers in 2021, according to an American Trucking Associations estimate. Without truck drivers, consumer goods (and building materials) are stalled as trucks are crucial distributers of those goods.

Some of America’s current supply chain woes can be traced back to the large number of workers who quit their jobs during the pandemic — and California is no exception to the ongoing Great Resignation. A record 4.3 million Americans quit their jobs in December of 2021 according to BLS data. In California alone, 415,000 people quit their jobs in November of 2021.

Get comfortable — experts believe these shortages will remain through 2022. As a result, Costar also reports that tenants are starting lease negotiations earlier than normal. In fact, commercial tenant clients in the Inland Empire (which boasts some of the lowest commercial vacancy rates on record) are negotiating two years in advance of their lease expirations thanks to today’s limited supply of buildings.

Commercial tenants are voting with their footsteps, and it’s become clear that they aim to get ahead of 2022’s rent hikes and strike at the market now. Be sure to get in contact with your clients early to clear this rapidly-rising hurdle.

Armed with this market snapshot and firsttuesday Journal reader benefits, agents can secure a favorable lease for their clients in the midst of this ongoing supply chain shortage. Download our Commercial For-Lease FARM flyer to start the conversation with your service area now. You can also browse and download our entire FARM Letter Library — free!

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