Office commercial real estate properties’ vacancies have increased significantly amid the COVID-19 pandemic, but the industrial market is experiencing the opposite, CNBC reports. Increased online shopping and customer demand for businesses to deliver products as fast as retailer giant Amazon has boosted the needed for warehouse space.
Industrial buildings’ vacancy rates are near record lows and new warehouses cannot be built quickly enough to keep up with clothing makers, furniture sellers and home appliance manufacturers’ needs, according to CNBC. Meanwhile, real estate firm CBRE’s first quarter report on the industrial and logistics market noted that approximately 100 million square feet of space was absorbed during that time frame—the third highest amount ever. CBRE also reported that a record 376 million square feet is under construction.
Rents increased by 7.1% from the first quarter of 2020, to an all-time high of $8.44 per square foot, according to CBRE. The company said in its follow up report last month that prices in coastal markets near population centers and inland port hubs were going up by double-digit percentages. Meanwhile, average base rents for industrial properties increased 33% in northern New Jersey during May from a year before. California’s Inland Empire and Philadelphia saw increases of 24% and 20%, respectively.
“The need to have facilities in these markets, coupled with record low vacancy rates, has often led to bidding wars among occupiers that are driving up rental rates,” CBRE said.
Spike in warehouse space demand was inevitable
The COVID-19 pandemic didn’t create a demand for warehouse and industrial space, it just accelerated it. Amazon was offering next-day delivery in early 2020 for its Prime members, forcing big box retailers like Best Buy and Walmart to add fulfillment space in an effort to keep up. Meanwhile grocery delivery services like Instacart and Postmates saw demand for their services spike because customers didn’t want to enter supermarkets and big box stores during the pandemic. Bloomberg reports that Instacart is planning a network of fulfillment centers while Target is solidifying its same-day fulfillment with “soration centers.”
ElmTree Funds, a private equity firm focused on CRE, is betting on industrial space demand remaining high. The firm has acquired approximately $2 billion worth of industrial space during the past seven months, more than it has in prior years, CEO James Koman told CNBC. Koman also estimated that the United States will need 135 to 150 million more square feet a year to support e-commerce growth.
Those figures are good news for a company like ShipBob, which provides fulfillment services to online retailers. The growing competition for warehouse space is generating higher costs for the company, however. While ShipBob provides a network of fulfillment centers for retailers, those spaces are on the smaller side compared to retail’s bigger players. ShipBob only has a handful of leases at its facilities; the company typically seeks warehouses that are family-owned with 75,000 to 100,000 square feet and some unused space. ShipBob then equips the centers with its tech and pays based on order volume and the amount of space it uses.
The company now finds itself splitting time between signing leases and competing for warehouse space that sits on property that’s much more valuable than it was just a year ago. ShipBob also has to have centers in areas like southern California, Louisville, KY, a major transportation and logistics hug, despite how quickly prices have increased.
“We have to find ways of placing inventory closer to the end customer even if it comes at a lower margin for us,” ShipBob CEO Dhruv Saxena said in a recent interview.
More delivery services on the horizon
With high demand for warehouse space comes more companies looking to fulfill deliveries. For example, Olive, an e-commerce start-up that’s working with companies to use recycled boxing materials and bundling items, is in its early stages. The company opened its first two 30,000 square foot warehouses last year, CNBC reports. The locations are in southern California and New Jersey. Olive founder Nate Faust said if he signed those leases today, they’d likely be 10 to 15% higher.
Faust also noted that while Olive isn’t actively looking for additional fulfilment centers, startups like his have to be opportunistic. The company is working with real estate firm JLL, which is always looking for attractive spaces.
“We have them looking all the time because industrial space is so tight right now,” Faust told CNBC. “If we find something perfect for what we’re looking for, it’s not unreasonable to have overlapping leases.”
Vik Chawla, a partner at Fifth Wall, a property technology (proptech) investor, said real estate market challenges have forced a lot of newer retailer brands towards the outsourcing model.
“It’s very difficult as a single e-commerce business to try to secure attractive space and run your business,” Chawla said. “The line of people trying to get into industrial buildings is out the door.”
Big third-party logistics providers like C.H. Robinson, FedEx and UPS are all in that line, according to CNBC. Meanwhile, companies like Amazon, Walmart and Target are collecting space to accelerate distribution. Amazon is also doing so to manage fulfillment for its large third-party seller marketplace. Prologis the largest industrial real estate owner in the U.S., said in a May report that utilization rates are almost 85% while vacancy rates are at a near record-low of 4.7%.
“E-commerce is a big component of (companies seeking industrial space) but it’s certainly not all about Amazon,” Micahel Curless, Prologis’ chief customer officer, said during a company earnings call. “Certainly, they’re the most active customer. But we’re seeing a lot of activity from the Targets, the Walmarts, Home Depots, and lots of evidence of the Chinese players making their way to the U.S. and Europe as well.”
Joe Dyton can be reached at firstname.lastname@example.org.