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Warehouse Space: The Next Big Real Estate Trend

Published on Thursday - January 23, 2014

Industrial warehouses, once an afterthought in the face of the recession, appear to have garnered the interest of significant buyers. As giant retail stores transition to a more online friendly approach, warehouse space is becoming a hot commodity. Companies are currently in the market for distribution centers that are closer to major metropolitan areas. In fact, several large players are primed to acquire large amounts of warehouse space this year. According to the latest PWC Investor Survey, a move of this nature could make warehouses the strongest prospect for both investment and development in 2014.

There is no denying the impact the Internet has had on consumer goods in the last decade. It has permitted retailers of every level and scale to expand their reach. Successful companies have taken advantage of this technology to reach the entire world. However, it would appear as if this trend is only beginning. Essentially, the Internet is the future of nearly every consumer good.

Already having predicted this, proactive companies are currently in a race to acquire massive warehouses and facilitate the growth of their online presence.

“Amazon is at the forefront of a larger trend that has seen demand for well-located logistics centers, very close to major urban centers increase sharply,” said Sam Chandan of Chandan Economics. “It’s some of the best performing space that we see in commercial real estate right now, across all property types.”

With Amazon already having committed to such a move, it is only a matter of time before other companies follow suit. Soon, if not already, smaller distribution centers in close proximity to major metropolitan areas will become somewhat of a commodity.

“They [Amazon] are probably the most creative and forward-looking people in this space, and seeing this type of thing doesn’t surprise me,” said Jack Cuneo, CEO of Chambers Street Properties. “It’s a great model, so you’re going to see more people emulating what they do and more need on their part for space.”

In order to reach customers faster, Amazon has proposed a system that will remove them from larger fulfillment centers and place goods in smaller distribution centers. The idea is to bring the product to the consumer. Placing more small distribution centers around the country will enable Amazon to do so. However, in the process, warehouse space is required. In fact, this shift in strategy is single-handedly responsible for the current warehouse recovery.

“It started with big box retailers, but in the last several quarters we’re seeing growing demand from the smaller businesses as well,” said Frank Cohen, senior managing director in Blackstone’s Real Estate Group. Cohen is responsible for Blackstone’s industrial venture investments, which include over 45 million square feet of facilities across the U.S. However, large chains are not the only ones buying warehouses. Smaller companies have realized the shift in strategy and are centering efforts on e-commerce.

As demand and rents increase, it should come as no surprise that warehouse development is on the rise as well, especially speculative construction. About 62 percent of the 59 million square feet under construction at the end of the third quarter of 2013 was being built without signed tenants, according to a report from CoStar, a commercial real estate data firm.

Trending warehouse acquisitions have caught the attention of investors on every level. However, unlike traditional investor strategies, distressed warehouses are not considered prime real estate. Typically, investors look to purchase distressed properties below market value with the intentions of fixing them up and selling them for more. However, the latest warehouse movement requires state of the art facilities. Therefore, new warehouses are in the highest demand.

“There will be more warehouse development because it’s the easiest and quickest to build, and there’s a tremendous amount of obsolescence in warehouse,” said Roschelle. “You need a robotic kind of model.”

Despite a weakened economy and a housing sector that is struggling to gain traction, the demand for newer warehouses has never been greater. This alone will benefit the entire housing sector. Investors who take advantage of this particular trend may be rewarded accordingly.

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