Warehouse market is on fire, driven by pandemic and e-commerce

Published on Sunday, June 19, 2022 at 1:40 PM.

The rise of e-commerce and the logistical nightmare of the coronavirus pandemic have boosted demand for warehouses in the United States, a trend that has not escaped the attention of investment funds that are big bets in this market.

“It’s a maddening battle to find a suitable location for clients,” says Michael Schipper of Blau & Berg, a commercial real estate specialist in New Jersey and New York, “digging up a property for sale.”

The free space rate has been falling steadily for a year and a half and is now at 3.4%, although more than eight million square feet of new warehouses were delivered in the first quarter of 2022, according to Jones real estate. Lang LaSalle.

The demand is such that, in just six years, purchase prices have multiplied by 3 or 4 in the region covered by Michael Schipper, in northern New Jersey. For rent, the average price has increased by 22% in the United States in two years, according to the company Beroe.

“Logistics and distribution for e-commerce are the catalysts for this need for space in the American market,” said Beroe, who noted that demand has outstripped supply for 18 months.

– “Last mile” –

In addition, unlike traditional warehouses, order picking via the Internet requires technologically advanced warehouses, underlines Mark Manduca, investment director at GXO, which offers logistics solutions to companies.

This equipment, which requires massive investments, allows “improving the efficiency of a site and accelerating warehouse activities to meet the demand for same-day delivery”, explains Beroe.

Invented by Amazon, the new standard of immediate delivery imposed itself on the big competitors of the Seattle giant, which had to line up.

Behind the Seattle giant, “many companies have accelerated the development of their online offer”, underlines Mark Manduca. “They are the ones that drive the demand for warehouses to the last kilometer”, the “last mile”, that is, they allow us to directly serve the final destination.

The tyranny of instant delivery has forced many brands to multiply storage locations to get closer to customers, particularly in urban areas where real estate was already expensive.

The pandemic spurred a movement that was already at work, causing e-commerce revenue to jump 56% between early 2020 and early 2022.

– Soon a fix?-

Another Covid effect, the big logistical mess caused by confinements and health restrictions. “We had containers in the wrong places, supply problems and, more recently, excessive inventories”, recalls Mark Manduca.

To limit those risks, he says, many companies are “looking for production sites closer” to their markets, “which increases the demand for warehouses.”

“We’re seeing a jump in companies building up their inventories to alleviate supply problems” and so are looking for additional space to store them, Jon Gray, number two at investment firm Blackstone, said in April.

Blackstone has invested heavily in the industry and currently has $170 billion in warehouses. Now it rivals Prologis, the number one in the world.

Other private equity giants such as KKR, Carlyle, Apollo or Sweden’s EQT have bought sites to ride the “storage” (warehouse) wave.

“The prospects for the warehouse market are positive in the long term, but we will have to take a break”, warns Michael Schipper, for whom the tightening of credit conditions, currently underway, could play a role. “You can’t continue on this trajectory indefinitely.”

Among the signs of a possible correction, Amazon’s decision to sublease or renegotiate the lease of more than 2.7 million square meters of warehouses.

“You’re going to see demand drop and rents stop rising at that rate,” Ward Fitzgerald, chief executive of EQT Exeter, a subsidiary of EQT, warned in the Wall Street Journal.

“The question,” according to Michael Schipper, “is how much and for how long. Nobody has the answer.”

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