A Closer Look at Industrial Real Estate | Think Realty | A Real Estate of Mind
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A Closer Look at Industrial Real Estate

Warehouses May Be a More Profitable Alternative to Retail Properties

Industrial real estate, which includes warehouses and distribution centers, is among the most profitable categories of investment properties. These types of properties offer yields as high as 7.5 percent, compared to between four and five percent for office space and five and six percent for retail space. Furthermore, long-term agreements, often ranging from five to 15 years, are possible in this sector. 

Technological advances have made the prospect of owning such properties even more interesting. Thanks to fully automated goods delivery in the next 10 to 15 years, we predict that the demand for offline stores will begin falling while that for warehouses will start increasing.

How 13-Minute Delivery Will Revolutionize Logistics

Personnel costs make up to 50 percent of logistic costs. When self-driving trucks, drones and industrial robots replace people, delivering goods will become a lot cheaper. Such technologies are currently being tested, appear not only promising but largely inevitable, and offer demonstrable benefits:

In April 2016, the Dutch Ministry of Infrastructure and the Environment tested 12 self-driving trucks, which crossed four European borders and travelled over 2,000 miles.

Amazon made its first drone delivery on December 7, 2016, in 13 minutes. The Amazon Prime Air program, currently under development, will deliver purchases of up to 2.3 kilograms, approximately 5 pounds in weight, within 30 minutes of ordering.

According to the South China Morning Post, Shentong (STO) Express already has robots working around the clock sorting up to 200,000 goods per day at its warehousing facilities in Hangzhou. This has enabled the company to halve its operational costs and improve efficiency by 30 percent. 

Cheaper and quicker deliveries will, in turn, stimulate online retail. According to global real estate firm Savills, this will make up 20 to 30 percent of direct consumer sales by 2025 to 2030. If e-commerce continues growing at this rate, it could reach $5.4 trillion globally by 2020. At the same time, according to research by Prologis, for every additional €1 billion (approximately $1.2 billion) spent online, another 72,000 square meters (approximately 86,000 square yards) of warehouse space is required, making the industrial real estate sector one of the most promising areas of commercial real estate for the coming decade.

New Requirements for Industrial Property

Technological advances and a shift towards electronic retailing will change how industrial real estate, which includes warehouses and distribution centers, is traditionally used.

1. Distribution Centers Will Need to be Larger

Self-driving trucks will enable the use of bigger warehouses, which will be constructed at greater distances from each other and from residential districts.

“If you look at the history of development, up until five to 10 years ago, a 500,000-square-foot building used to be considered a ‘big box’ building. With all that’s going on in e-commerce, now it’s become a million-square-foot mega-distribution center,” Colliers national director of industrial services Dwight Hotchkiss said. 

2. Multilevel and Multi-Story Warehouses Will Increase in Number

According to CBRE, if land costs comprise 50 percent of the warehouse construction cost, the developer should increase its height and make the building multilevel or multi-story for it to be economically viable. While it is difficult for people to use such warehouses, automation makes storage, unloading and packaging easier.

According to Colliers, the ceiling height at U.S. distribution centers increased by 25 percent to 36 to 40 feet from 2006 to 2015. Multi-story warehouses are common in places where land prices are high, such as Hong Kong, Singapore, Tokyo, South Korea, and densely built European markets.

3. Demand for “Last Mile” Warehouses Will Grow

As large distribution centers proliferate, the demand for the “last mile” warehouses (from which goods are delivered directly to the buyers) will increase, and same-day delivery will become the new standard for the logistics market.

According to CBRE analysts, such warehouses, which will be up to 200,000square feet in size, must be located within the limits of a densely populated city to ensure the delivery of goods to buyers within a few hours.

4. New Uses for Warehouses

Experts predict a partial crossover between warehousing and retail property. 

For instance, shopping centers in large U.S. and European cities often have parcel lockers, self-storage facilities equipped with credit/debit card terminals and/or enabled with contactless payments, where buyers take delivery of goods ordered online.

Savills analysts believe that new warehouses must have the possibility to be used differently. As a result, hybrids of industrial facilities, distribution centers and retail, with more space for data centers, photo studios and offices will emerge. Vacant spaces can be let or sublet just like in business centers. Under these circumstances, facilities that can be refurbished to accommodate market requirements will be in higher demand.

The Opportunity for Investors

According to estimates by Colliers, China, driven primarily by population growth, will have the highest demand for warehousing facilities globally over the next five years, which equates to a need for up to 527 million square feet of new facilities each year. This is followed by the U.S. (135 million-square-feet) India, the United Kingdom, Ireland, Australia, Western Europe, Mexico, and Turkey. In its first quarter 2016 report, Jones Lang LaSalle (JLL) recognized France, Croatia, Poland, Romania, and Slovakia; countries where prices for such properties run at less than €70/m² – as promising European markets.

Tranio generally recommends investing in warehousing properties that cost upwards of €2.5 million. Cheap properties often have high risks, including an unfavourable location, poor condition, or a small operator that will “eat up” the investor´s profits. It may be interesting for American investors to invest into European markets as a means of portfolio diversification. Different currency and different market situation can mitigate risks and protect capital.

Furthermore, the U.S. industrial and logistics market is hot. According to CBRE research, tight supply pushed net asking rents up in many core markets, with growth averaging 1.5 percent for the second quarter and 6.6 percent year-over-year to $6.78 per square foot, the highest mark since CBRE began tracking this metric in 1989.