Investing in Warehouse Property: A Primer
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
Recent years have seen a rise in the popularity of warehouse property investments among real estate investors and for good reason. Due to factors like the expansion of e-commerce, just-in-time inventory management, urbanization, and the effects of the COVID-19 pandemic on supply chain management, the demand for warehouse real estate has been rising quickly in recent years. But, a FreightWaves analysis concludes that through foreseeable 2023, warehouse space will likely be hard to come by. This also suggests that before investing in this industry, investors should carefully assess the need for warehouse space in certain markets, both now and in the future.
What Factors Influence Demand For Warehouse Space?
A number of variables, including population growth, employment growth, e-commerce sales, and logistics costs, have a significant impact on the need for warehouse space. FreightWaves` analysis predicts that between 2020 and 2025, e-commerce sales would increase at a compound annual rate of 12%, fueling demand for warehouse space. The research also mentions how just-in-time inventory management is expanding, which is driving up demand for distribution centers and warehouses near large population centers.
Dynamics and Hazards of Supply
Despite the substantial demand, it has been anticipated that space would remain scarce through 2023. The FreightWaves research claims that there is a shortage of warehouse space because the supply of new space is not keeping up with demand. When making an investment in warehouse property, investors must thoroughly assess the local market and demand to reduce the danger of an oversupply.
The quality of tenants should also be taken into account while assessing possible warehouse properties. Although the demand for warehouse space is rising as e-commerce expands, it`s vital to remember that not all renters are created equally. Tenants who specialize in e-commerce fulfillment typically need more square footage per tenant than other types of tenants. Investors should think about the different types of potential renters property might attract, and whether or not they are likely to be dependable and stable tenants over the long run.
Possibility for Future Growth and Expansion
Investors should likewise think about the possibility for future growth and expansion in a specific market in addition to the existing demand for warehouse space. This comprises elements like fresh infrastructural initiatives, modifications to travel habits, and modifications to consumer behavior. For instance, as FreightWaves points out, as e-commerce has grown, there is now more need for last-mile distribution centers that are smaller and closer to urban areas. When assessing possible warehouse facilities, investors should take these trends into account and search for buildings with room for growth.
Tenant Concentration
Another factor to consider when evaluating potential warehouse properties is the number of tenants. As we saw in the recent news about Amazon scaling back tits warehouse portfolio, having a single tenant that accounts for a large portion of the rental income can be a risky proposition. Investors should look for properties with multiple tenants to diversify the risk and reduce the impact of any one tenant leaving, or negotiate for better terms to compensate for this risk.
Other Perils to Consider
It`s crucial to remember that purchasing warehouse real estate carries certain risks. The possibility for oversupply in particular markets is one of the primary risks involved in warehouse investing. In the next years, more warehouse space is anticipated to be built, which might result in an oversupply and reduced rental prices in some regions.
The possibility for changes in technology and customer behavior should be taken into account as another risk. For instance, the development of 3D printing technology may lessen the need for warehouses by enabling businesses to make goods as needed, thus reducing the need for storage space. Consumer behavior shifts could likewise affect warehouse space demand. The demand for warehouse space in specific regions may change if people start buying in new ways or if the trend toward urbanization slows down or reverses.
Putting It All Together
For real estate investors seeking reliable, long-term income, purchasing warehouse property can be a wise choice. Nonetheless, given that it is anticipated that warehouse space will remain scarce through much of 2023, potential investors should thoroughly assess the regional market and demand elements, including new technologies that could reduce demand for space before entering this industry. Investors can make informed decisions and create a diversified real estate portfolio that includes warehouse and other types of property by taking into account the factors driving demand for warehouse space, the dynamics and risks of supply, the potential for future growth and expansion, and the risks to keep in sight.
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