Commercial and industrial real estate markets are changing. As e-commerce continues to take up larger slices of consumer spending, the need for spaces like storefronts is declining. But this means other types of real estate are booming. In a prime example, an increased reliance on e-commerce is leading to rapid growth and demand for logistics space, including warehouses and distribution centers.
E-commerce companies currently represent 40 percent of industrial property leases. This is only expected to grow as Amazon and its competitors continue to innovate new services and lower the expected amount of time associated with package delivery. Faster delivery times require e-commerce companies to grow their real estate footprint, creating a wealth of opportunities for savvy investors.
Industrial real estate investments are different from residential and commercial investment opportunities. Learning how to structure a deal and arrange a lease for a warehouse will provide you with the skills necessary to pursue a valuable investment deal not every investor is thinking about.
Get to know the types of warehouses
Before investing in warehouse space, understand that not all warehouses are equal. There are several different types of warehouses developers create to serve distinct needs within the supply chain. Here are just some of the most common types of warehouses you’ll encounter in the real estate market, and what you should know about them:
· Public warehouses: Public warehouses are available under short-term leases meeting temporary distribution needs. For instance, if a company accidentally orders surplus inventory, or is gearing up for the holiday season, they may lease a public warehouse. Many public warehouses service multiple clients at a time. Public warehouses are flexible investment opportunities, but often represent a less stable source of income.
· Private warehouses: Private warehouses operate under long-term contracts with single tenants, or are privately-owned by the corporation directly. Some companies with excessive capital may build their own warehouse infrastructure, while others prefer to obtain private warehouses through the use of long-term contracts. Private warehouses are often stable, reliable investments for real estate purchasers.
· Distribution centers: At distribution centers, the goal isn’t to store products, it’s to move them. Distribution centers exist as a place for both e-commerce companies and brick-and-mortar retailers to house products before shipping them to their final destination. Distribution centers tend to be located closer to large population centers for this reason. At a typical distribution center, they’ll receive a shipment and send it back out before the end of the day.
· Climate-controlled warehouses: Many perishable products aren’t capable of withstanding the drastic temperature swings in a typical warehouse setting. For this reason, climate-controlled warehouses are used. Most climate-controlled warehouses store and distribute grocery items, though flowers, electronics and other products may also need to be shipped using climate control.
Purchasing a warehouse investment
Warehouse investments represent a lucrative opportunity for real estate investors with the capital to pursue them. As consumer demand for e-commerce products continues to increase, it’s likely the demand for warehouse and distribution space will also expand accordingly.
If you’re thinking about purchasing a warehouse to include in your investment portfolio, you’ll need to determine which type of warehouse is most closely aligned with your strategy. Distribution centers, for instance, may be closer to your place of residents, and are easier and more convenient to manage. If you’re looking for a long-term investment you can set-up and collect a return on, a private warehouse may be more well-suited to meet your goals.
Regardless of the type of warehouse you decide to purchase, you need to determine the value of your potential acquisition. Here are some things you’ll need to consider:
· Loading dock count: One of the most important considerations companies look at when determining whether to lease a warehouse is the number of external loading docks at the site. The more loading docks there are, the more attractive it is to high-volume e-commerce tenants. Especially at distribution centers, moving products in and out consistently and rapidly is of utmost importance.
· Warehouse clearance: The clearance of a warehouse indicates its interior height. This determines everything from how much product can be stored on-site to the types of machinery used within the warehouse. Older warehouses tend to have clearance heights of 24 feet, newer assets usually include between 30 and 32 feet of clearance.
· Available office space: The amount of available office space within the warehouse asset is significant. Even relatively simple warehouse operations will need on-site management. Large, productive warehouses without space for employees and managers to congregate can become problematic for tenants. Between 5 and 10 percent of the warehouse floor space should be set aside for management use.
· Land area: Consider the amount of land available around the warehouse prior to purchasing it. This will determine its value for many reasons. For instance, warehouses with lots of surrounding land have the opportunity for future expansion, depending on tenant demand. Additionally, more land equates to more employee parking.
· Location: The location of your prospective warehouse purchase will determine its value more than any other factor. Always look for warehouses and distribution centers within a few hours’ drive of a major population center, located near expressways, highways and rail lines. Proximity to an airport is also valuable. Finally, consider how accessible the site is to a local labor force.
While warehouse investing isn’t right for all real estate professionals, it can be a great way to diversify your real estate portfolio and help meet growing demand for logistics-oriented spaces. Learning how to invest in warehouse space will help you establish a relatively low-maintenance investment requiring very little attention. Plus, warehousing stands to possess the potential for fairly high returns—especially as e-commerce tailwinds continue to grow.
One of the key takeaways for investing in warehousing is to think about the structure from a logistics point of view—not a tenant mindset. Don’t try to anticipate a company’s warehousing needs. Instead, position your warehouse as a resource that’s highly adaptable, supremely flexible, and well-located to serve any need!