Industrial Users and Investors Navigate Challenges to Secure Space

The rapid rise of e-commerce has put increased pressure not only on shippers and logistics firms, but on owners and investors in the industrial real estate space. Connect CRE asked David Freitag, EVP and branch manager at DAUM Commercial Real Estate Services, for insights into how users and investors alike are facing the challenges of securing warehouse space to meet this demand. 

Q: How is the accelerated rise of e-commerce continuing to affect the ability to secure prime industrial space? Have its impacts shown any signs of slowing down in the near future? 

A: Industry sources estimate that the consumer demand from e-commerce requires up to three times more industrial warehouse space than conventional brick-and-mortar sales to fulfill orders. To allow for same-day or one-day shipping, the need for last-mile distribution warehouses in particular has grown immensely. 

These additional inventory requirements for retailers and last-mile locations have propelled a significant increased demand for warehouse space and we anticipate this upwards trajectory will continue into the foreseeable future – as companies like Amazon have shifted focus to ‘delivery time competition’ versus ‘pricing competition.’ 

As Jeff Bezos said, “It’s impossible to imagine a future ten years from now where a customer comes up and says… I just wish you’d deliver a little more slowly.” 

As a result, in recent months, many markets throughout the country have experienced record-low industrial vacancy rates and rising prices, causing challenges for those seeking prime space. 

That said, for those willing to migrate to submarkets that require a slightly further commute from key locations like ports, there remain opportunities to occupy ample space – that is often nicer, newer, and more efficient. 

For example, in Southern California, e-commerce growth is driving a higher demand for space in the Inland Empire not only from its existing tenants, but also from coastal companies tired of high prices in tight submarkets. This is an acceleration of a trend we’ve observed over the past few years. The abundance of undeveloped land in the Inland Empire has resulted in over 27 million square feet of industrial buildings currently under development, which are being pre-leased to distribution, manufacturing, and e-commerce companies. 

Q: What other economic trends are impacting users and investors searching for industrial space? 

A: Throughout the COVID-19 pandemic, the industrial market proved resilient. That said, the alteration in behavior for many businesses due to the pandemic has caused the supply chain to reinvent itself, which has also driven up demand for more warehouse space to accommodate. 

Further, activity at the Southern California ports is impacting demand in the region and throughout other western markets. Record amounts of cargo are being imported consistently, which has caused major delays in the supply chain, steadily increasing rental prices, and high demand and competition in container storage space. 

Q: How can industrial users and investors best secure the properties they need to grow their portfolios and expand in tightening markets throughout the country? 

A: Recent studies show that almost half of industrial markets saw double digit gains year-over-year. For that reason, approximately 637 million square feet of industrial warehouses are being constructed across the country. 

We are also seeing an increasing trend in adaptive reuse in the sector. Investors and developers are acquiring infill office product that is zoned for industrial, with the intention of redeveloping the site to Class A industrial product. 

Despite the consistent delivery of new inventory, it is critical amongst high competition that those seeking industrial space develop a relationship with a broker that has immense knowledge of the respective markets, so that industrial users and investors will be able to move quickly when an opportunity is presented.