Low Rates, High Rents

The shift in consumer spending from fewer goods to more services has not been good for transportation, but transport landlords are holding the line on rents.

The “transportation recession” is now one year old and in full spring bloom. Transportation companies generally enjoy an annual late Q1 surge in freight as retailers boost inventories for the spring/summer, but not this spring. A review of 25 Q1 reports from all corners of the transportation industry found most transportation companies are reducing their whole-year guidance, lamenting continued strong headwinds in their business segments, seeing margins narrow and ORs rise, and/or are looking to shed capacity. You would think that would portend an end to a red-hot transportation real estate rental market, but you would be wrong.

Recent leases we’ve inked suggest that transport real estate landlords have been holding the line on rents for the places transport companies park, clean, repair, load, and unload their trucks, trains, and planes. While transportation companies are stalling on new market openings and branch expansions (tenant demand is hovering at around 60% of 2022 levels), when leases do get signed, transport real estate rents seem to be holding their own.

We reached out to 25 mostly private, mid-sized, over-the-road transportation companies with multiple, live, North American transport real estate requirements to see first if these prospects would pay rents recently achieved in their target markets, and second, whether the prolonged freight recession had dampened enthusiasm for opening new locations. About 70% (17/25) of tenant prospects were accepting of rents in at least the majority of their target markets and 60% (14/25) were optimistic that the prolonged freight and rate drought would be behind us by 2024.

Transportation companies have historically been low-margin, poorly-capitalized affairs, and are often front-of-line for rent relief during weak transportation spells. More often than not, transport property landlords were actually competitive transport companies operating in the same low- or no-margin environment - often in the same market(s) - as the tenants. As landlords’ balance sheets were often as weak as those of their tenants, transport property often traded amongst equally-impaired traders, so pricing suffered. Twenty years ago, for example, about 15% (1/7) of cross-dock truck terminal real estate traded in bankruptcy, usually to a competitor. Not so today.

Today there is more venture-level capital available for transportation ventures and, separately, more real estate capital available for transport real estate investments, than ever. Venture-level investment is spurring consolidation in all segments of the transportation space, thus creating larger, better-capitalized transportation industry tenants. These better-capitalized tenants are the prize for real estate investors who bring still more and cheaper investment capital to the transportation space through the real estate route, which bolsters the sector’s collective balance sheet. Win-win.

As a result, Transportation real estate rental rates and values don’t track as closely to the state of the transportation industry as they once did, which is good for both the transportation sector and transportation real estate investors. It also explains the apparent disconnect between a prolonged freight slowdown existing alongside high transport real estate rental rates. Managers of better-capitalized businesses can have a longer-term investment horizon than less well-capitalized managers.