Warehouse space doesn’t come cheap or easy these days. Retailers and other businesses are generating plenty of demand, but a lack of buildable land, materials, and labor, are making it tough for surging industries to find suitable warehouses that fit their future needs. This, coupled with North America’s shift to onshoring and manufacturing closer to home, has created unique opportunities for groups open to creative real estate ideas. That pain point has led many clients to turn to commercial real estate firm Hughes Marino for a guiding light.
“There has been an unprecedented ‘pent-up’ demand for warehouse space due to e-commerce’s massive growth,” explains Hughes Marino Senior Vice President Mike Paleo. “It’s been estimated that for every $1 billion in online sales, over 1.5 million square feet of industrial warehouse space is needed to support it.”
Paleo adds that the industries feeling the biggest squeeze are e-commerce, aerospace and defense manufacturers, biotech, electric vehicle, and battery manufacturers. Simultaneously, all of these industries are battling a difficult labor market as well.
“Additionally, new warehouse deliveries are coming online at a slower pace due to supply chain disruptions [and] steel, concrete, and roofing materials’ short-term storage needs,” says Paleo. “As a result, the industrial sector is faced with a complicated scenario where the new supply that would ease pressures is also delayed by supply chain issues, turning the pressure up even more.”
Hughes Marino Managing Director Tucker Hughes agrees, adding, “The need to lease more space to store inventory was coupled with the need to facilitate faster deliveries.”
“One tactic was to secure warehouse space in smaller infill areas, putting product closer to delivery points. These last-mile fulfillment centers, as they are often called, have become almost as ubiquitous as Starbucks, and increased demand for smaller warehouses as well as larger ones.”
Not surprisingly, Hughes Marino sees this challenge as a significant opportunity. The firm’s teams (with offices throughout California in addition to Denver, Seattle, Boston, and Raleigh-Durham, North Carolina) are helping clients find storage solutions in land-rich markets like Phoenix, Salt Lake City, and South Carolina, says Paleo.
He points out: “The industrial real estate market has been on a fast-moving roller-coaster ride through the pandemic, and it’s not slowing down just yet. While the general public is pausing cautiously for a recessionlike dip, industrial developers are feverishly battling for the front seat of the ride.”
As Inventory Surges, Space Wanes
In Seattle and other metropolitan markets, local and national retailers continue to search for more warehouse space. Building owners say retailers are bringing in additional inventory to protect themselves against stock-outs caused by supply chain problems. In addition, big-box stores and other outlets have been left with large quantities of unsold goods.
“Business leaders are left with the dilemma to pass on their cost to the consumer, suffer through the pain, or relocate into a lower-cost market,” explains Paleo. “When you weigh the cost of transportation and trucking versus the delay of goods coming into the port, it became feasible for retailers to look at putting inventory on a truck and trucking it over to cities like Las Vegas, Atlanta, and the land-rich Texas markets [like] Dallas, Houston, and San Antonio. These softer markets offer ample space to develop these large logistics facilities, and the overall real estate costs are notably lower than the coastal markets near the ports.”
Meanwhile, containers loaded with goods are piling up at seaports. Distribution pipelines across the country are also overloaded. And that’s not the only problem. Hughes notes, “With the rapid increase in demand for e-commerce food and beverage products during the pandemic, there has been an equal increase in demand for industrial facilities that can provide cold storage to accommodate those products. These facilities are highly specialized and require a tremendous investment in infrastructure and equipment — driving prices up beyond the average cost of a standard warehouse.”
With scarce warehouse space available in Seattle, Prologis, a real estate investment trust that invests in warehousing, devised a unique solution. In November 2018, the firm built the United States’ first vertical warehouse. Not surprisingly, Amazon and Home Depot were among the first tenants. Since then, many others have adopted the innovative vertical solution, creating multistory warehouses in metro markets.
Other clients are resorting to even more creative tactics to plunk their goods down into usable warehouse and fulfillment space.
“Markets with a higher percentage of ‘second-generation’ facilities have an opportunity to repurpose and modernize buildings to fit modern occupiers’ needs,” adds Paleo. “In these situations, we look for creative solutions to solve for increased utility without the need for raw land. Some solutions include increasing the sprinkler capacity to allow for more efficient racking or using excess or nearby yard space to add additional buildings, or constructing additional dock wells and doors. In some cases, it has even been viable to increase the height of the ceiling to accommodate higher racking solutions.
“Unprecedented demand for warehouse space due to e-commerce growth and inventory restocking will continue to outpace supply and new construction. This is the new normal, and operating in a tight market such as this forces businesses and their brokers to think outside the box to find viable solutions. More and more, we find that the best solution for our client is more nuanced than a simple lease transaction.”
However, these are complex projects with multiple moving parts and can take considerable time.
Paleo adds that Hughes Marino has also helped numerous pie-eyed companies revise “wish lists” to find workable solutions. When a company can’t find usable space in a first-tier market, it may consider options in second or third-tier locations. It must ensure that the alternative site has an ample workforce to pull from, sufficient road access, and infrastructure support to enable successful operations.
Building Warehouses From Scratch Has Its Challenges, Too
What made for a suitable warehouse space twenty years ago is pretty much obsolete for many industries today. To that end, Paleo says some companies are resorting to building new commercial space from scratch or retrofitting older spaces with much-needed tune-ups.
“More than half of our nation’s warehouse inventory was built before 2000, which accounts for about 65% of the stock. Most of these buildings have clear-ceiling heights of 27 feet or lower. Unfortunately, anything lower than 32 feet is obsolete to modern occupiers’ stacking needs. Other issues with older facilities include inadequate trailer space, an insufficient number of dock doors, obsolete floor slabs, and a lack of access to suitable power and sprinkler systems.
“The average age of the country’s industrial warehouse product is 40 years old,” Paleo explains. “Much of the older stock of logistics warehouses are being torn down and rebuilt, or the structures are being modified.”
Hughes Marino Reflects on Other Warehouse Industry Woes
Building warehouses and other commercial spaces is more expensive than ever. In 2022, the price of construction supplies skyrocketed across the United States. These steep prices resulted from higher raw materials costs and supply chain issues, and these two factors often exacerbated each other.
“Raw land is not the only facet of the industrial real estate market experiencing a jump in pricing,” says SVP Paleo. “We have also seen the cost of raw materials and construction labor increase as well. Costs for concrete and steel have doubled and even tripled over the past couple of years, and construction delays due to supply chain issues are wreaking havoc on initial estimates.
“Supply chain disruptions have caused manufacturers to rethink their production strategy,” Paleo continues. “Major manufacturers have set up production closer to home so that goods are created near the buyer. This helps manufacturers avoid bottlenecks at the ports and any other supply chain issues that may be caused by COVID outbreaks in other countries.”
Under Pressure, Supply and Demand Fundamentals Are Shifting
Inflation, economic headwinds, and global turmoil are causing many firms to take pause and observe how things may change for them and for the real estate market at large next year.
Ironically, the same e-commerce behemoth that helped set warehousing on fire is now releasing a pressure valve. Amazon raised eyebrows when it announced earlier this year that it plans to sublease anywhere between 10 million square feet and 30 million square feet of warehouse space and that it would reevaluate leases with outside warehouse owners.
“It’s tough to tell if this is a symbol of the market shifting or if Amazon is just lightly taking its foot off the pedal for a while,” says Paleo. Still, he adds, the Hughes Marino team is keeping a sharp eye on changing trends in what he calls the “new normal.”
“I believe that the global supply chain had major issues long before the pandemic,” he says. “The pandemic just exposed its flaws and created an immediate urgency to begin the correction process. And this process is not a quick fix. The bottom line is that e-commerce will continue to rise and take a share from retail.
“Occupiers will continue smarter expansion tactics despite any GDP slowdown because of the need to modernize the supply chain and the reality that e-commerce purchasing is here to stay. At Hughes Marino, we are eagerly facing these challenges with our clients and look forward to playing our part in this changing landscape of industrial real estate,” adds Paleo.