The rise of e-commerce has helped the industrial warehouse asset class become one of the most resilient commercial real estate sectors over the last several years.
According to the 2022 U.S. Real Estate Market Outlook from CBRE, a record-setting 448.9 million square feet of industrial space is currently under construction. However, even with the massive amount of new product coming to market, demand is still projected to exceed supply.
This article covers the cost of building an industrial warehouse and lists some of the best industrial markets for commercial buildings and real estate investment.
Factors Affecting Industrial Warehouse Costs
Industrial warehouse construction costs will vary based on the type of warehouse in question. For example, a basic storage warehouse with a small flex office space will cost significantly less to build than the multi-level warehouse with robotic systems found in Amazon’s buildings:
Industrial warehouse types
- Basic storage
- Refrigerated with humidity control
- Traditional bulk storage with forklifts
- Automated workflow with robotic and conveyor systems
Materials & type of construction
- Pre-engineered metal structures are less expensive and generally used for smaller warehouses
- Tilt-up construction uses wall panels cast in concrete on-site; itis typically used for large industrial warehouses and distribution centers
Cost to Build an Industrial Warehouse
Location and land costs significantly impact the cost of building an industrial warehouse. Warehouses construction prices range from $85 to $202.50 per square foot in select cities, based on the most recent research from Statista:
Four Types of Warehouse Construction Costs
There’s quite a cost difference between building a warehouse for rent in the San Francisco Bay Area and a Sunbelt city like Phoenix. Investors should consider four types of construction expenses that affect the overall cost of building a warehouse:
Hard brick-and-mortar costs in building an industrial warehouse include land and site development, paving and grading, landscaping and utilities, construction equipment, labor and materials, LEED certification, and life and safety systems.
Soft warehouse construction costs include:
- Engineering and architectural design.
- Permitting and legal fees.
- Taxes and insurance.
- Moveable equipment and fixtures installed in the warehouse.
Developing a warehouse can involve three types of commercial real estate financing:
- A short-term construction loan with partial releases if the industrial development has multiple sites
- Bridge financing to pay off the construction loan
- Permanent takeout financing once the warehouse project is completed and fully leased.
Operating expenses and long-term costs of owning and managing an industrial warehouse may include property management, utilities and maintenance, CapEx, property taxes and insurance, and environmental control features.
Industrial Warehouse Market Performance
While there are many variables affecting the cost of building an industrial warehouse, one thing that isn’t fluctuating is the swelling demand from tenants for industrial space for rent in 2022.
Cushman & Wakefield’s U.S. Industrial MarketBeat Industrial Q1 2022 report states that the market absorbed 108.7 million square feet of industrial space in Q1 2022. That’s an increase of over 7.8%, compared to the same quarter last year.
Per the above report, all sectors of the industrial class are seeing surging demand and record-high rents, including warehouse/distribution, manufacturing, and high-tech space:
- Rent growth +15.2%
- The average asking rent is $7.89 per square foot, NNN
- Vacancy 3.3%
- Net absorption 108.7 million square feet (through Q1 2022)
- Inventory 16.1 billion square feet
- Deliveries 87.2 million square feet (through Q1 2022)
- Under construction 660.8 million square feet
Cap Rates are Compressing
Booming investor demand for industrial assets is causing cap rates to decrease across the country, while the cap rate spread is compressing between primary and secondary markets. For example, CBRE reports that cap rates in Phoenix and Las Vegas are comparable to the Inland Empire, and Indianapolis and Columbus industrial cap rates are similar to Chicago levels.
In Phoenix and Las Vegas, cap rates for industrial assets are 3.5% and 3.7% respectively, while industrial product in the Inland Empire is trading at a cap rate of 3.1%.
According to the report, large institutional investors’ demand for industrial assets makes it difficult to find Class A industrial space. As a result, more capital is now being targeted toward Class B properties, which is driving down cap rates for this product class.
With interest rates and the cost of capital at all-time lows, industrial assets are expected to see continued price increases for the foreseeable future. Higher sales prices for industrial warehouse space are justified by the ongoing imbalance between demand and supply, with rents for industrial space up 15.2% year-over-year.
Industrial Markets to Watch
According to CBRE, industrial commercial real estate markets in the Southwest and Southeast are among the top emerging logistics markets.
Phoenix, Las Vegas, Salt Lake City, Reno, San Antonio, and Central Florida are witnessing robust population and job market growth due to business-friendly state governments offering low taxes, location incentives, and training programs for distribution employees.
Industrial real estate investors seeking the best opportunities may want to set their sights on Texas.
Between 2010 and 2020, Texas’ population soared by nearly 16% and is estimated to have increased by another 1.6% last year alone, according to the U.S. Census Bureau. As a result, industrial markets in Dallas-Fort Worth, Houston, San Antonio, and El Paso benefit from continuous in-migration.
In smaller cities, occupiers and investment capital are flowing into inland port markets with air and rail connectivity, such as Greenville, Memphis, Indianapolis, Columbus, and El Paso.
The Bottom Line
The industrial warehouse sector has been among the best performing commercial real estate asset classes, with demand projected to rise in the years ahead.
For developers thinking about building industrial warehouses, key factors affecting construction costs will include the type of structure being built and the materials used.
While the cost of building a warehouse varies widely between cities, all builders should consider hard and soft costs, cost of financing, and long-term operating expenses.