This article was written by George Livingston, Chairman of NAI Realvest. George is a member of MCC’s Board of Directors and is widely recognized and sought out for his expertise in the commercial real estate community. The article discusses the current role of warehouse properties in the commercial real estate market. We would welcome your comments and suggestions on the topic.
Warehouses Have Value
Warehouses do not have much glamour, but they do provide excellent long term value and returns, and do so with a low degree of volatility.
The reasons for this are that this market segment is less affected by the economic cycle than other property types. Warehouse tenants tend to have stable needs and typically stay where they are, especially if the building is not obsolete and the landlord can help them expand or contract their space. These characteristics make warehouses the defensive property asset of choice, especially in slow economic conditions and in tough markets
The industrial sector also tends to avoid the feast or famine of oversupply. This is due to the fact that the time to construct is less than say office or apartment buildings. This allows warehouse developers to quickly respond to new demand, or the lack of demand.
The demand for new space is up. Tenants are again expanding now that the economy has shown positive growth for some time. As a result, the current vacancy rate in the US is roughly only 8%. At this level of occupancy, landlords will begin to recover pricing power too.
As we have moved to more of a consumption based society and less of a manufacturing economy, we see consolidation as well as expansion as a result. Logistics has become the driver to seek efficiencies in the supply chain. This has resulted in the consolidation of large distribution warehouses into fewer but even larger, better located and more efficient warehouses when cost is the driver. On the other hand, this has also resulted in the need for smaller fulfillment warehouses close to the end users when time matters. The developing expansion of ports to handle the import of finished goods on both coasts has increased the need for buildings that can respond to this change in the supply chain. The demand for manufacturing space will continue to decline, and U.S. manufacturing plants will relocate to non-union and low cost U.S. markets or to overseas locations to compete.
Despite these positive trends, few new warehouse buildings are being constructed in most markets due to short supplies of zoned land, high land costs, high interest rates, and higher costs to construct.
On the negative side, off-shoring has reduced the overall need for manufacturing buildings and also for distribution warehouses as deliveries will increasingly go directly from the source to the end destination, especially for small deliveries. Interior markets are especially hard hit. This trend is likely to persist. Florida, on the other hand, as a coastal state with a large and growing population base, will benefit.
The net result of these trends has been to drive warehouse vacancies down, occupancies up, time to absorb vacant space down, and rents up. This has in turn increased the demand for warehouses by investors, so values are up and cap rates down. So far, the increased supply of new warehouses has been modest. Investors therefore find it increasingly hard to purchase properties or portfolios.
The industrial market segment is enjoying a near perfect storm. Warehouses are not pretty, but they are a preferred property type right now and they are good long term investments.
George Livingston, CIPS
2200 Lucien Way, Suite 350
Maitland, FL 32751
(407) 875-9989 ext 701
(407) 949-0701 direct
(407) 875-3137 fax