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Warehouses: A new favorite

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Strong occupancy gains and dwindling supply of big box, as well as the rise in ecommerce, has set off a boom in the market for warehouses.

Ask any property investor about their own American dream, and you find owning warehouses that serve as “fulfillment centers” (centers that dispatch orders for the surging online-retail business) high on the list. Gone are the days when real estate investors covet glamorous skyscrapers in cities like New York and Philadelphia. ECommerce has become the new game changer: Its advent has shaken up both the commercial property and retail business and, as of today, as much as 5.2 to 6.2 percent of all sales in America are done online (Chaffey, 2013; Economist, 2014). Before e-commerce took a bite out of the earnings from these two sectors, real estate funds used to rely on income from shopping centers and the rents that accrue from well-located malls with entertainment amenities have proved resilient. Not anymore: As their tenants lose market share to online rivals with wider selections and lower prices, second-tier facilities of this type are floundering. Most of the successful bricks-and-mortar retailers are also facing an existential threat as online retailers expand their home delivery and click-and-collect offerings.

Passing the baton

The best way to explain the battle between real estate companies and ecommerce is to state that it is a zero-sum game: When ecommerce gain commercial property owner loses, and vice versa. In United States, the doyens of ecommerce – Amazon and eBay – often locate their warehouses and fulfillment centers within about 60 miles of a big city and near seaports, airports, highways, and the busiest sorting facilities of courier companies like UPS and FedEx. In most cases, their warehouses and fulfillment centers are not only bigger than the traditional types but can also employ far more people, sometimes as much as 3000 people who work on shifts, especially during festive periods like Christmas. The growth of these kind of warehouses in United States have been rising at a staggering pace, reaching approximately 14.5 million square meters in 2012 – a value that is double the pace in 2008. According to Prologis, the world’s biggest industrial property owner, ecommerce accounts for a hefty chunk of this growth, since about 30 percent of the projects built for specific tenants are tied to online sales(Economist, 2014).

It should be noted here that a high rate of construction can lead to oversupply and excess capacity, which could conceivable drive down prices. However, given that American industrial rents rose by 3.4 percent in 2013, a figure that brought them within 6 percent of their 2008 level, there is no sign of glut in the market for now. As a matter of fact, the growing demand for big box distribution centers to fulfill ecommerce orders had continued to outstrip the new supply of space, which remains at historic lows, and retail rents are still 12 percent off their peak (Solomon, 2014; Economist, 2014).

Good for the goose, perfect for the gander

The above pattern is also observed in less mature ecommerce market, such as in Europe and some developing countries. It is estimated that by 2019, internet sales in Europe will grow by half, a figure that would account for about 5 million square meters (16.4 million square feet) of new warehousing. The volume of internet sales may end up becoming larger than this estimate if continental Europe follows the lead of the British people who buys a significant amount of their groceries digitally. Simply put, as much as 5 percent of food in Britain is now sold online – a figure that is far above the average in both the European Union and the United States. It is thus not surprising that, to just handle home-delivery orders alone, Tesco (which is considered to be Europe’s third-biggest online retailer) had to open six “dark stores” around London (EuroStat, 2014; Economist, 2014).

The growth prospects in the emerging markets are high too. In China, for instance, online sales are rising rapidly as internet penetration and middle class continues to grow. Demands for logistics space in that country is growing even faster than the overall market. No wonder China is sometimes regarded as the world’s biggest ecommerce market. At first, China’s local governments, which controls land use, were convinced that warehouses generate little tax revenue. As a result they were reluctant to authorize new warehouses. But today, they are readier to give investors planning permission since they have realized that ecommerce warehouses create lots of jobs. According to GLP, one of the major players in China’s commercial property market, firms linked to ecommerce occupy a quarter of its holdings in China (Economists, 2014).

Other big emerging markets that offer healthy growth prospects are Brazil and India. In Brazil, the growth of warehousing is being inhibited by weak infrastructure and cumbersome planning rules. Things are much the same in India, where they are below 2 percent. However, India could experience a new wave of construction as the country’s new government proposed sales tax reforms – reforms that would facilitate national distribution networks. In response to that, Amazon’s management is making plans to spend as much as $2 billion to open warehouses in India.

It’s gotta be them

One good news is that the U.S. economy has finally attained a period of stronger growth that will be sustained over the next two years. There’s a high chance that the country’s GDP can average at least 3.5 to 4.0 percent over this period – a value that represents nearly double the pace of the recovery so far(Cushman & Wakefield, 2014). The improving confidence in the business sector is one of the key reasons for this positive outlook. What is certain is that the demand for distribution space and fulfillment centers from both the traditional and the online retailers as well as from the third-party logistic players will remain strong for the foreseeable future. In addition, the supply of this type of properties has a very slim chance of catching up with the demand anytime soon. Thus, in a practical sense, vacancy rate will continue to tighten for the next two years and this would place even greater upward pressure on rental rates in the commercial property market.

References

Chaffey D. (2013): Forecast Growth in Percentage of Online Retail/Ecommerce Sales. Smart Insights. Retrieved August 12, 2014 from http://www.smartinsights.com/digital-marketing-strategy/online-retail-sales-growth/

Cushman & Wakefield (2014): United States. Market Beat – Industrial Snapshot. Retrieved August 19, 2014 from http://www.cushmanwakefield.com/~/media/marketbeat/2014/08/US_AMERICAS_MarketBeat_Industrial__Q22014.pdf

Economist (2014): Commercial Property – Stores of Value. Retrieved August 12, 2014 from http://www.economist.com/news/business/21610288-rise-e-commerce-has-set-boom-market-warehouses-stores-value

Eurostat (2014): E-Commerce Statistics. Retrieved August 19, 2014 from http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/E-commerce_statistics

Solomon M.B. (2014): Surging U.S. Industrial Property Demand Outstrips Supply, Sending Vacancies Falling, Rents Rising. D. C. Velocity. Retrieved August 19, 2014 from http://www.dcvelocity.com/articles/20140529-surging-us-industrial-property-demand-outstrips-supply/

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