Warehouse Distribution: The Investor’s 1st Choice
Investors large and small have long seen industrial warehouse/distribution property as a safe and stable haven for their capital. That is especially true today. It is now the preferred product type across the investor spectrum including large institutions, private equity funds, and publicly-traded REITs, as well as family offices, small private investors and space occupiers. Why are these concrete boxes getting so much attention these days? The simple answer is this: business demand for space is strong and the prospects for that to continue are as sure a bet as there are these days. Let’s take a look at why that is the case.
E-Commerce: A Driving Force
Warehouse space is just one of several industrial product types and is the focus of this post. Generally speaking, it is characterized by its higher ceiling heights, robust fire suppression systems, dock-high loading, and limited office buildout. While the popularity of warehouse product cuts across all size ranges, investor appetite for so-called “big box” projects has exploded in the age of e-commerce. Major distribution hubs like Atlanta, Dallas, Philadelphia, Chicago, and California’s Inland Empire have experienced massive amounts of new construction, and that space is getting snapped up by the likes of e-commerce giant Amazon, major retailers like Walmart and Target, along with a long list of the third-party logistics (3PL) operators. Leases for one million square feet or more have become commonplace and that has net absorption running at record levels across the country.
Focus on Function Driving Values Higher
New product built to meet ongoing demand is also fueling rapid rent growth because first-generation space is built to accommodate new materials handling technologies that make space more efficient. High pile storage racking systems and in-rack fire sprinklers allow warehouses to utilize more cubic storage capacity, reducing needed floor space. The expectation for this trend to continue has fueled investor competition for quality projects, driving sales prices to record high levels, as well.
Institutional investors prefer big-box warehouse deals because they are larger transactions and there are fewer tenants to manage. They also like the fact that bigger tenants are generally more creditworthy and willing to sign long term leases.
Last Mile Demand on the Rise
While big-box leases dominate the quarterly headlines, the emphasis on shorter delivery times in the e-commerce sector has fueled the proliferation of “last mile” distribution centers designed to get products closer to consumers. Technical advances in supply chain management allow e-commerce providers to anticipate demand for specific products and deploy inventory accordingly. Last-mile operations are often under 100,000 square feet and they are becoming more prevalent secondary population centers, which has given an additional boost to the industrial product sector, even in secondary cities and outlying suburban submarkets.
Easier to Manage/Easier to Lease
Property management considerations also figure into the popularity of warehouse products with investors. Warehouse uses are less intense than manufacturing uses and that means less wear and tear and fewer components to maintain and replace. Add the fact that the majority of warehouse space is leased on a net basis, which relegates much of the maintenance cost and operational responsibility to tenants.
Warehouses are also more general-purpose in design and configuration. So, as long as a space has adequate ceiling height, fire suppression equipment, and easily accessible dock high doors, it can be efficiently utilized by most distribution users. That reduces retrofit cost and downtime when space becomes vacant, as compared to manufacturing space, which tends to be a more special purpose in nature.
Scarcity Driving Rent Growth
In mature markets like Orange and Los Angeles counties, the availability of industrial land suitable for warehouse development has all but dried up. What little is left is either too expensive to make a project pencil or is being re-purposed for high-density residential units and mixed-use projects. This has resulted in record-low vacancy rates that have given warehouse investors the ability to keep lease rates moving higher while holding the line on tenant concessions like free rent and interior improvements.
No End in Sight
Of all the major commercial property types, warehouse/distribution is healthiest. Demand is running consistently ahead of demand, and rising land and construction costs continue to put upward pressure on lease rates. The e-commerce phenomenon has caused a fundamental shift in consumer spending habits that few would deny is here to stay. One only has to look at the rise of Amazon to see that e-commerce is here to stay, and virtually every package delivered today and in the future will begin its journey in a warehouse.
