Remember the first half of 2020 when our biggest fear was running out of toilet paper? It was something we all needed, and there wasn’t enough to go around. That realization caused consumers to panic-buy as much toilet paper as they could before it ran out, further contributing to the growing toilet paper shortage.
The industrial real estate sector is seeing a similar trend right now with warehouses. Warehouse capacity remains at record lows across the United States, while demand keeps rising. As projections for industrial shortages move further out, many supply chain stakeholders have elected to lease more warehouse space than they need to hedge against future shortages.
How Long Will the Warehousing Shortage Last?
Much of the growth in warehousing demand comes from the massive growth in e-commerce throughout the COVID-19 pandemic. Estimates have shown that online fulfillment takes approximately three times as much space as standard retail distribution since inventory isn’t distributed across a store footprint.
With that number in mind, it becomes easy to see how an online or omnichannel retailer could quickly run out of fulfillment space in the current environment. Aside from other e-commerce retailers, add competing demand coming from reshoring manufacturers, life sciences, data centers, and transportation facilities.
Unfortunately, COVID-19 protocols and building material supply shortages have hindered the ability of developers to deliver new supply. With the construction sector under constant threat from new variants and supply chain issues not expected to resolve until late 2022 (or even longer), industrial real estate constraints won’t end soon. Some experts believe that industrial real estate demand pressure won’t let up until at least 2025.
Should My Company Hoard Warehouse Space?
While the analogy may be amusing, the truth is that warehouse space is not toilet paper. The health of a business may depend on its ability to expand its storage or fulfillment capabilities within the next few years. Unlike those consumers that chose to panic-buy months’ worth of toilet paper in 2020, businesses can make more informed decisions before buying or leasing a warehouse that exceeds current needs.
When determining whether you should seize an opportunity to grab up more square feet than you currently require, ask yourself the following questions:
- What do my growth projections look like? Are you sure that your business will need a bigger warehouse before 2025, when supply should begin to catch up with demand? Rely on sales trends, growth projections, and any other data you can gather to make an informed decision.
- Can I sublet extra space? Subletting any square footage you don’t need is an excellent way to keep extra space on the back burner without incurring extra cost. Finding a short-term subletter shouldn’t be too challenging in the current market.
- Is the space flexible? If you’ve found an opportunity to rent a bigger warehouse than you need, you could consolidate operations under one roof. With flexible warehouse space, you can convert part of the warehouse into office space until you need it later. Unlike a warehouse, new office space won’t be as hard to find down the road when you need to take the warehouse floor back.
- Am I panicking? There’s nothing wrong with planning, but make sure you’re making the investment in excess space for the right reasons. Gaining ten or twenty thousand square feet of real estate just because it’s there isn’t worth putting your company at risk.
- Is my broker acting in my best interest? First, be sure to vet your broker well so you know you can trust their intentions. Once you know that, discussing your options with your industrial real estate broker during your warehouse search may also help you to determine if renting a bigger space now is in your best interest.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.