Warehouses Become Sexy

There is a certain glamor to many types of commercial real estate. High-rise office buildings define the skyline of most major cities. Regional and super-regional shopping center provide millions of shoppers with a multitude of opportunities to indulge themselves. Residential subdivisions and luxury apartments express community lifestyles.

Often forgotten are the properties that are rarely seen by most consumers. The activity that takes place in these buildings make the operation of the other property types possible. These are the logging and mining operations that extract raw materials from the earth, the power plants and manufacturing facilities that convert these materials into consumer products, and the sewage treatment plants and sanitary landfills that dispose of the society’s waste.

Also forgotten are the links in the supply chain that get the products from the creators to consumers. Historically, warehouses have operated behind the scenes, holding inventory available primarily for shipment to retail stores.

With the growth of internet sales, however, this role is changing. Customers are no longer willing to wait a week for delivery of their orders. They now expect delivery within two days, the next day, or even the same day. To accommodate these expectations, goods are now often shipped directly from warehouses. This has created new challenges in maintaining adequate inventory at the best locations.

In the days when retail customers bought practically all their products in retail stores, warehouse managers maintained various combinations of owned and leased warehouse space that was optimized to supply these stores. They accepted the facts that they would have excess warehouse space during slow seasons and would have to deal with excess inventory during busy seasons. With a week or more of advanced notice to ship products, they could rely on huge warehouses in remote locations and near ports for most of this space. This space was cheap, so maintaining excess space was not a serious problem. Both receiving and shipping docks only had to accommodate tractor-trailers for full truck load deliveries.

With increased expectations of rapid delivery, however, this landscape has changed. Now, inventory must be stored close enough to major population centers so that it can be delivered directly to customers promptly. Delivery volumes are often less than truckload or individual packages, so shipping areas must accommodate smaller trucks and other delivery vehicles, or even passenger cars.

The on-demand warehouse industry is confronting these challenges directly. These warehouses no longer exclusively store inventory owned by the warehouse owner or tenant. In addition, they provide short-term storage to whoever needs it.

The system that makes this possible is similar to an on-line auction. Warehouse owners and tenants who have excess space post the details of their space on a web site. Retailers with excess inventory search these posts for available spaces that will meet their needs. Contracts are normally negotiated on a per-pallet basis, but a per item service, known as pop-up fulfillment, is also now available.

This service provides new opportunities for warehouse investors. Prologis, the largest owner of very large warehouses, reported a significant scarcity of warehouse space in 2016. Much of this is being addressed with the construction of new warehouse space in rural areas. Nonetheless, a survey by the Baynard Institute indicates that 48% of respondents report that inventory exceeds their current capacity. A survey conducted by the largest on-demand provided, FLEXE (pronounced “Flex”) indicates that warehouse vacancy is at its lowest level in 17 years.

Densely populated areas have less available land and what is available commands higher prices. The newly constructed warehouses also have dock-height floors and dock doors designed to accommodate tractor-trailer loads. Conversely, older warehouses are more likely to be in densely populated areas and to have drive-in doors. As on-line retailing expands, these represent some of the best facilities for next-day or same-day shipping. On-demand spaces can often command higher rental rates than long-term spaces and, if they can manage to find retailers who face peak warehousing needs at different times, they can maintain high rates of utilization.

All of this presents real estate investors with a great opportunity. They can purchase the older warehouses in densely populated areas at discount prices and fill them with inventory from retailers competing to deliver the latest revolution in customer service. These represent a great opportunity for investors.