The warehouse business has become hyper-localized because of the e-commerce revolution and consumer expectations that instant gratification comes to those who refuse to wait. A study by Deloitte found 64 percent of consumers were not willing pay extra for two-day shipping, and that study dates back to 2017. Three years later the percentage of consumers insisting they will give no-extra-pay-for-anything-but-first-day deliveries has only grown.
Hence the explosion in the number of so-called last-mile warehouses — relatively small 50,000 to 100,000 square foot facilities — designed to get ever closer to consumers and meet their exacting expectations. What’s more, last-mile warehouses are located in densely populated areas that command higher real estate prices. In this new e-commerce and consumer-driven world of logistics, supply lines consist largely of goods shipping to seaports, then trucked to major suburban warehouses and, in turn, fed to a proliferation of small, last-mile warehouses located close to consumers for same-day deliveries.
One of the people who has closely watched the trend playout is Dwight Merriman, head of industrial at Black Creek Group, a real estate investment manager.
What consumer preferences or demands have given rise to last-mile warehouses?
The reality is that the days of three-day to five-day shipping of consumer goods are long gone, and same-day delivery is becoming the new norm. Consumers’ see now, buy now, receive now expectations are driving a continued rise in last-mile warehouses, which are located near urban areas and allow retailers to delivery everything from groceries to clothing on a same-day timeframe. This consumer appetite for speedy delivery continues to make last-mile warehouses a critical component of the supply chain.
Talk about the size and location of last-mile warehouses, and where they fit into the real estate landscape.
We’re seeing tenants favoring the smaller footprint of last-mile industrial buildings: More than two-thirds of the more than 150,000 industrial leases signed nationally since 2010 were for less than 50,000 square feet, indicating significant demand for smaller industrial assets. Also, buildings that provide flexibility may be positioned well for the long term. For example, a last-mile industrial building that caters to both businesses that serve the local economy in their respective markets, and larger e-commerce related firms, exhibits insulating characteristics that may mitigate any potential long-term demand volatility.
How have last-mile warehouses performed to date?
Last-mile warehouses are experiencing historically high occupancy and rental growth. Since 2016, occupancy rates have hovered around 96 percent nationally, and an additional 850 million square feet are projected to be needed to serve e-commerce between 2019 and 2023. On the rental growth side, last-mile rents have increased 6.3 percent annually from 2015 to 2018. This is up significantly over an average increase of 2.6 percent since 2006. Last-mile rents have increased more significantly than of any of the four main property sectors (industrial, retail, office and multifamily).
What trends are you seeing in last-mile warehouse space?
The e-commerce revolution continues to drive unprecedented demand for last-mile warehouses. E-commerce is still relatively young — online sales made up approximately 11 percent of the $5.4 trillion in total U.S. retail sales for the 12-months ending Sept. 30, 2019 — yet it continues to accelerate quickly at a rate of 17 percent year-over-year since 2009. To put this in perspective in terms of impact on the commercial real estate space, consider that every $1 billion in e-commerce sales requires about 1.25 million square feet of warehouse space.
How can advisers get their clients involved in this space?
There are a number of ways advisers can help clients access commercial real estate for their portfolios. Commercial real estate investing typically takes two forms: public and private. Public real estate investing vehicles include REITs, stocks, mutual funds and ETFs, which are traded on an exchange; while private real estate is not listed on an exchange and typically is not subject to the stock market volatility that impacts public real estate. Ultimately, though, clients and advisers should discuss what is the best way to gain access to the space, based on the client’s needs.