Industrial Real Estate’s Place In A Post-Pandemic Economy
AVP Leasing, Simone Development Companies.
In the wake of the Covid-19 pandemic, a swirling vortex of information and theories of the long-term effects on commercial real estate spread far and wide. Many experts are reporting their predictions for the new normal. National commercial brokerage teams are scrambling to adjust by assembling top talent to sponsor Covid-19 advisory services for office tenants and landlords as office utilization and availability rates increased sharply. Suggested actions like this, as well as theories and predictions, are endlessly blanketing the real estate news reports, but a big story often missed is the surge of demand for warehouse properties and industrial sites. They are being acquired at a growing rate by developers and tenants everywhere, with projections showing continued growth. It appears a new king of the hill has emerged, industrial warehousing.
Industrial Property As A First Choice
Looking at the big picture, this new story means that warehouse and industrial property investment is no longer a second choice for investors. For decades, industrial development was not considered a primary focus by many investors. The rental rates were often low compared to other commercial property rents. Industrial properties often provided space for industries ranging from manufacturing, light assembly, distribution to recycling — and everything in between. The supply of available properties was readily available pretty much anywhere. The ROI on industrial was often attractive, but with rents per square foot typically in the single digits throughout the country, significant returns for investors required massive scale.
E-commerce has paved the way for a new industrial movement. Sites that once housed manufacturing, recycling and assembly businesses are now being replaced with last-mile distribution facilities to handle delivery of new products to consumers. Industrial areas in cities once filled with scrap metal yards, packaging, manufacturing and auto salvage are being repurposed for home delivery grocers and other same-day e-commerce businesses. Last-mile delivery needs have brought on a resurgence in warehouse demand as retailers step up to meet consumer demands. During Covid-19, national brick-and-mortar tenants like Home Depot and other retailers across the globe immediately pivoted to e-commerce platforms and expansion of distribution facilities out of the necessity brought on by the changing retail landscape. Big box retailers like Target and Best Buy that remained open across the country rolled out a delivery platform to compete with Amazon, Whole Foods and Fresh Direct. Third-Party Logistics (3PL) tenants are also contributing to demand as overall e-commerce sales have increased 44% year over year.
Expansion Of Industrial Tenants
Warehouse planning and logistics specialists were once regarded as a secondary priority by many businesses. Operations and logistical departments that were typically price-sensitive had a make-it-fit selection process. Historically this was acceptable due to the once lower cost of land, labor, fuel and other company expenses. Fast forward to today’s industrial atmosphere, location and logistics experts carefully identify and scrutinize targeted markets prior to being evaluated and selected. Last-mile tenants often use a sophisticated best-in-class matrix to evaluate locations. E-Commerce businesses are utilizing architects and designers specializing in warehouse efficiency and design modalities. As the steady uptick of rents of just over 3% quarter over quarter in prime markets like the New York City Metro and approximately 30% over the past five years show, a trend is emerging that prioritizes efficiencies of access, location and design over lower rental costs.
E-commerce and last-mile warehouse tenants no longer consider rent as the primary driving factor in regards to location evaluations. Premium rent locations — where properties offer efficient loading, parking and ceiling heights for automated sorting technologies — can be offset through the evaluation of logistic costs analysis. In many cases, this shortens dead-end routes for delivery drivers by creating effective routes that may double the delivery routes one driver can make in a day. This effectively doubles the amount of product moved when compared to warehouse locations that may be cheaper but only allow for one route per day per driver.
Warehousing As An Art
Following the site selection process, another trend is emerging from the post-pandemic e-commerce boom. Warehouse tenants are now more open to investing considerable resources into site evaluation as well as capital improvements into older but well-located infill facilities. A recent example I’ve seen came up in New York City. A permit application was submitted to the NYC Department of Buildings for nearly $5 million dollars worth of construction work to improve a 117,000 square foot property leased by Amazon.
The archaic evaluation process of assessing rent as inexpensive and then making it fit is a thing of the past. Warehouse tenants are now becoming more technology-minded. They now have significant technologies available to them that may entice many to invest more in soft costs. These include Geotech surveying, ultrasonic mapping of the site to identify unseen underground irregularities, phase 1 and phase 2 environmental test reports, as well as digital and laser mapping of the interior premises to maximize operational layouts. These are all actions that can be carried out long before the lease is signed. Upon occupancy, warehouse tenants can and often will make significant long-term hard-costs investments such as efficient HVAC installations, solar panels, electrical upgrades, construction of additional loading docks and social breakroom facilities for employees.
The acceleration in changes to consumer patterns influenced by the 2020 pandemic is unprecedented. As consumer perceptions and patterns shift, e-commerce sales continue to boom and so will the demand for warehouse properties. Whether it’s convenience, dry goods, perishables, wearables or electronics, all demographic consumer groups are engaged in increased e-commerce spending. The warehouse is at the forefront of investors and tenants alike with a strong trend line upward. If it wasn’t known before, real estate’s previously ignored asset is in vogue and just getting hotter.
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