Office commercial real estate vacancies have increased significantly amid the COVID-19 pandemic, but the industrial market is seeing the opposite, CNBC reports… The rise in online shopping and consumer demand for grocery delivery businesses is just as fast as retail giant Amazon has increased its need for warehouse space.
Vacancy rates for industrial buildings are close to record lows, and new warehouses cannot be built quickly enough to meet the needs of apparel manufacturers, furniture retailers and home appliance manufacturers, according to CNBC. Meanwhile, CBRE’s first-quarter industrial and logistics market report notes that nearly 100 million square feet were developed during that period, the third-highest ever. CBRE also said a record 376 million square feet are under construction.
Rentals rose 7.1% from the first quarter of 2020 to a record $ 8.44 per square foot, according to CBRE. The company said in a follow-up report last month that prices in coastal markets near settlements and inland ports were up double-digit percentages. Meanwhile, the average base rents for industrial properties in northern New Jersey rose 33% in May from a year earlier. The Inner Empire of California and Philadelphia saw an increase of 24% and 20%, respectively.
“The need to have premises in these markets, coupled with record low vacancy rates, has often led to a rental war between tenants, which has pushed rental rates higher,” CBRE said in a statement.
A surge in demand for warehouse space was inevitable
The COVID-19 pandemic did not create demand for warehouse and manufacturing space, but simply accelerated it. Amazon offered next day delivery in early 2020 for its Prime members, forcing big box retailers like Best Buy and Walmart to add fulfillment space to keep up. Meanwhile, grocery delivery services such as Instacart and Postmates saw a surge in demand for their services because customers were reluctant to enter supermarkets and large outlets during the pandemic. Bloomberg reports that Instacart is planning a network of fulfillment centers, while Target is strengthening its fulfillment on the same day with “service centers.”
ElmTree Funds, a private equity firm specializing in CRE, is committed to maintaining high demand for industrial space. CEO James Coman told CNBC that the company has acquired nearly $ 2 billion in industrial space over the past seven months, more than in previous years. Coman also estimated that the United States would need 135 to 150 million square feet per year to support the growth of e-commerce.
These numbers are good news for a company like ShipBob, which provides fulfillment services for online stores. However, the growing competition for warehouse space is driving up costs for the company. While ShipBob provides a network of fulfillment centers for retailers, those locations are smaller when compared to larger retailers. ShipBob only has a few leases at its facilities; the company typically looks for 75,000 to 100,000 square feet of family warehouses and some unused space. ShipBob then equips the centers with its technology and pays based on order volume and space used.
The company is now forced to divide time between signing leases and fighting for storage space on properties that are much more valuable than a year ago. ShipBob should also have hubs in areas such as Southern California, Louisville, Kentucky, major transportation and logistics hubs, despite how rapidly prices have risen.
“We need to find ways to place inventory closer to the end consumer, even if it has a lower margin for us,” ShipBob CEO Dhruv Saxena said in a recent interview.
More delivery services on the horizon
Due to the high demand for warehouse space, more and more companies are appearing to carry out supplies. For example, Olive, an e-commerce startup that works with companies to use recycled packaging materials and components, is in its infancy. The company opened its first two 30,000-square-foot warehouses last year, CNBC reported. Locations are in southern California and New Jersey. Olive founder Nate Faust said that if he signed these leases today, they would probably be 10-15% higher.
Faust also noted that while Olive is not actively looking for additional sales centers, startups like him need to be opportunistic. The company cooperates with the real estate firm JLL, which is always looking for attractive premises.
“We keep making them look for them, because now industrial areas are very limited,” Faust told CNBC. “If we find something perfect for what we are looking for, it makes perfect sense to have overlapping leases.”
Vic Chawla, a partner at Fifth Wall, a real estate technology investor (proptech), said that real estate problems have forced many new retail brands to move to an outsourcing model.
“As a single e-commerce business, it is very difficult to try to provide an attractive space and run your business,” Chawla said. “The line of people trying to get into industrial buildings is already outside the door.”
According to CNBC, this line includes major third-party logistics providers such as CH Robinson, FedEx and UPS. Meanwhile, companies like Amazon, Walmart and Target are gathering space to accelerate distribution. Amazon also does this to manage order fulfillment in its large third-party seller market. Prologis, the largest industrial property owner in the US, said in a May report that the utilization rate is nearly 85% and the vacancy rate is at a near-record low of 4.7%.
“E-commerce is an important component (of companies looking for industrial space), but it certainly isn’t all about Amazon,” said Mikael Kerless, Prologis’ chief accountant, during a phone call to the company’s reports. “They are by far the most active buyers. But we are seeing a lot of activity from Targets, Walmarts, Home Depots and a lot of evidence that Chinese players are also making their way to the US and Europe. “
Joe Dayton can be reached at email@example.com.