The U.S. industrial market is on pace for a record leasing volume with activity through July reaching 587 million square feet – 52 percent more than the year-earlier period, according to a new report from CBRE. Sharply higher transportation costs – which are rising faster than rental rates – is helping to fuel this robust leasing activity.

The spike in transportation costs – across sea, land and air – is the result of backlogs at ports, rising fuel prices and increased strong consumer demand driven by e-commerce growth and the pandemic’s continued effects. For example, the cost of shipping a 40-foot container by sea from Shanghai to the Port of Los Angeles is up 235 percent from this time last year, according to Drewry Supply Chain Advisors.

To hedge against further rising costs, companies have expanded domestic warehouse space to reduce the frequency of long-distance shipping.

According to CBRE’s Supply Chain Advisory, transportation costs can account for 50 to 70 percent of a U.S. company’s total logistics spend. Fixed facility costs, including real estate, comprises only 3 to 6 percent.

“It takes roughly an 8 percent increase in fixed facility costs to equate a 1 percent increase in transportation costs,” said Joe Dunlap, managing director of CBRE’s Supply Chain Advisory. “The increased real estate costs pale in comparison to what they are experiencing with transportation costs. They are calculating that it is better to pay higher rents if they can lower transportation costs with a strategic occupancy plan.”

This year’s robust leasing activity has driven the national warehouse vacancy rate down to 4.0 percent, which, in turn, has catalyzed a 9.7 percent jump in first-year rental rates.

Third Party Logistics (3PL) providers have benefited from the exponential growth in transportation costs because more occupiers have responded by outsourcing distribution and warehousing. As a result, 3PLs have leased 121 million square feet of bulk (100,000 square feet and above) industrial space, representing a 31.3 percent market share. This is nearly double the 66.8 million square feet (24.5 percent) 3PLs leased in the same period last year.

“Retailers and manufacturers are increasingly reliant on the market expertise of 3PLs to help them navigate significant supply chain challenges. As a result, 3PLs’ robust appetite for warehouse space shows no sign of waning,” said John Morris, executive managing director and leader of CBRE’s Americas Industrial & Logistics business.