Soaring warehouse demand boosts commercial real estate market with rising office vacancies

As a result of the rise of e-commerce, industrial vacancy rates are approaching an all-time low, while utilisation is rising and prices are at all-time highs. The demand for fulfilment centre space is the hottest, while firms are consolidating offices in favour of hybrid and remote work.

Soaring warehouse demand boosts commercial real estate market with rising office vacancies

Last July, after deciding to allow employees to work from anywhere, ShipBob had its landlord construct a wall in the centre of its Chicago offices so that half of the space could be rented out to another firm. The office reopened on March 1 with a limited capacity for socially distant meetings.

ShipBob's real estate demands have been growing at a rapid speed, even though the company is using less office space. Since mid-2020, the firm, which provides fulfilment services to online retailers, has more than quadrupled its warehouse count to 24, including four outside the United States, with aspirations to reach 35 by the end of 2021.

ShipBob fulfilment center in California

The seven-year-old firm is a microcosm of the commercial real estate industry in the United States. While office vacancies have risen as companies prepare for a post-Covid future of dispersed work, the industrial sector is booming, thanks to a pandemic-fuelled spike in e-commerce and rising customer demand for more items delivered at Amazon-like rates.

Vacancy rates in industrial buildings are at record lows, and new warehouses are being erected at a breakneck pace to fulfil the demands of apparel manufacturers, furniture retailers, and home appliance manufacturers. According to CBRE's first-quarter report on the industrial and logistics sector, over 100 million square feet of space was absorbed in the period, the third-highest amount ever, and a record 376 msf is under construction.

As per CBRE, rents increased 7.1% year over year in the third quarter to an all-time high of $8.44 per square foot. Prices in coastal markets near population centres and inland port hubs are increasing by double-digit percentages, according to follow-up research published last month by the firm. In Northern New Jersey, average base rent for industrial properties jumped 33% in May from a year earlier, followed by California’s Inland Empire increasing by 24% and Philadelphia at 20%.

The need for facilities in these areas, combined with historically low vacancy rates, has frequently resulted in bidding wars among occupiers, driving up rental costs,” CBRE said.

Skyrocketing Prices

Before Covid-19 arrived in the United States in early 2020, the wheels were already in action. Amazon had already made next-day delivery the default option for Prime members, and big-box retailers such as Best Buy and Walmart were scrambling to build fulfilment capacity to keep up. Everything was hastened by the epidemic. Consumers were stranded at home, purchasing more items, while physical businesses were forced to become digital to survive.

Instacart and Postmates were suddenly flooded with orders from consumers who didn't want to go inside a Costco, Albertsons, or Kroger store, adding to the market's tightness. According to Bloomberg, Instacart is building a network of fulfilment facilities equipped with cereal-picking robots, and Target has boosted same-day shipping with so-called sortation centres.

The pandemic revealed the vulnerability of the global supply chain, in addition to the fast change in consumer behaviour. Stores faced severe shortages of clothing, car components, and packaging materials as a result of the closure of operations in China and elsewhere.

According to James Koman, CEO of ElmTree Funds, a commercial real estate private equity firm, retailers responded by acquiring extra storage space to reduce the impact of future shocks.

Manufacturing reshoring is getting traction,” Koman added. Companies are "bringing more items onshore and require room for them so we don't slip into another crisis like we're in right now," according to the report.

All of these things, he claims, are leading to rising costs. Furthermore, due to inflation and supply limitations, construction prices have increased, and businesses are constructing more complex facilities with robots.

Koman explained, “You have these conveyor belts, automatic forklifts, and automated storage retrieval systems. This is the way the world is heading.

Robots at Amazon's fulfilment center

ElmTree has bought approximately $2 billion worth of industrial space in the last seven months, outperforming previous years, according to Koman, betting on a long-term need for fulfilment and logistics facilities. According to him, the United States would require an extra 135-150 million square feet each year to sustain e-commerce development.

The e-commerce boom has been beneficial to ShipBob's business strategy. However, the company's prices are rising as a result of the increased competition for space.

ShipBob partners with companies such as Dossier Perfumes, Juspy Powdered Energy Drinks, and Tom Brady's sports and fitness brand TB12 to provide a vast network of fulfilment facilities and software to handle deliveries and inventories.

Unlike the retail giants, ShipBob doesn't go after big fulfilment centres the size of football fields, and only has leases at a handful of its locations. Rather, it seeks out warehouses that are generally family-owned and have between 75,000 and 100,000 square feet of space. It then equips them with ShipBob technology and charges them based on order volume and storage capacity.

ShipBob isn't negotiating contracts, but it is vying for space in warehouses that are now far more expensive than they were a year ago. Despite the significant rise in pricing, ShipBob CEO Dhruv Saxena believes his firm has to be in places like Southern California and Louisville, Kentucky, a major transportation and logistics hub.

We have to discover methods to get goods closer to the end consumer, even if it means a lower profit for us,” Saxena said in an interview last month after his firm secured $200 million at a $1 billion valuation. ShipBob competes directly with ShipMonk, Deliverr, and Shippo, among other fulfilment outsourcing start-ups. Those four businesses have raised over $900 million in the last year.

Not only Amazon

Smaller shops use ShipBob to avoid the expense and bother of obtaining fulfilment facilities and employing the necessary employees, according to Saxena. He compared it to businesses outsourcing their computing and data storage needs to Amazon Web Services and paying for the capacity they use instead of leasing their own data centres.

The math is the same,” Saxena explained. “I can either create a warehouse, hire people, and rig the software, or I can transform those fixed expenses into variable costs and pay per transaction.

Nate Faust is in the early phases of launching Olive, an e-commerce start-up that works with businesses to provide more environmentally friendly packaging and shipping alternatives by utilising recycled boxing materials and bundling items.

Last year, Olive opened its first two 30,000 square foot warehouses in New Jersey and Southern California. Faust, who previously co-founded and later worked at Walmart following the purchase, said such leases would easily be 10% to 15% higher if he were signing them now.

Olive isn't actively looking for other fulfilment facilities, and its contract isn't up until February, but Faust believes that start-ups must be opportunistic. He's working with JLL, a real estate business that, according to him, is always on the lookout for appealing premises.

As industrial space is so scarce right now, we have them looking all the time,” Faust explained. “It's not unreasonable to have overlapping leases if we discover something great for what we're searching for.”

The problems in the real estate market, according to Vik Chawla, a partner at venture company Fifth Wall, which invests in property technology, are forcing more developing brands and sellers to the outsourcing model.

Trying to acquire attractive premises and manage your firm as a single e-commerce operation is really difficult,” Chawla added. “There's a line out the door of people wanting to get into industrial buildings.”

Traditional large third-party logistics providers (3PLs), such as C.H. Robinson and XPO Logistics, as well as UPS and FedEx, occupy a large portion of that line. Amazon, Walmart, and Target are squeezing space at the top of the market to expedite delivery and, in Amazon's case, to handle fulfilment for its enormous marketplace of third-party sellers.

In a May report, Prologis, the largest owner of industrial real estate in the United States, stated that utilisation rates had reached close to 85%, while vacancy rates stood at 4.7%, which is close to a record low.

According to Prologis' last annual report, Amazon is the real estate firm's largest customer, occupying 22 million square feet, followed by Home Depot (9 million), FedEx, and UPS. Walmart is in seventh place.

At Prologis' earnings conference in April, an analyst inquired about the sorts of clients that were most actively seeking leases. In response, Michael Curless, Prologis' chief customer officer, stated, "E-commerce is a significant component of it, but it's clearly not all about Amazon. They are, without a doubt, the most attractive consumer but we're seeing a lot of activity from Targets, Walmarts, and Home Depots, as well as signs of Chinese players expanding into the United States and Europe.”

Source: CNBC