Despite improving recent ceasefire and prospects for peace, oil prices are likely to stay elevated as infrastructure is rebuilt and reserves are replenished. In the near term, higher fuel costs may pressure industrial demand in markets reliant on long‑haul trucking. Over the medium to long term, however, supply‑chain resiliency, defense spending, and AI‑driven e‑commerce growth should support incremental industrial demand.
Since Covid, tenants have prioritized supply chain resiliency leading to higher spending on reshoring, diversification, inventory management and automation. On top of these costs, rents have risen significantly and tenants are now far more cost sensitive. This favored cost mitigation strategies in recent years, such as multi‑directional distribution hubs, and consolidation into modern high‑throughput bulk facilities. Elevated energy costs are likely to reinforce these trends, with higher drayage costs —the expense of moving shipping containers short distances between ports, rail yards, and distribution facilities—disproportionately benefiting infill markets near population centers.
By way of example, Phoenix—highly dependent on shipments from Southern California ports—has been disproportionately impacted by the 30% rise in national drayage costs over the past year, with further pressure likely as higher fuel costs flow through. Put simply, tenants chose low-cost rental locations in recent years as the freight market was at its nadir. The increase in drayage costs may shift demand back toward Southern California, where shorter drive times and meaningfully lower rents since 2022 improve relative cost competitiveness. Together, these dynamics underscore the premium on well‑located, infill industrial assets and reinforce replacement‑cost discipline as higher construction and operating costs constrain new supply.
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