Warehouse real estate users get creative amid tight, competitive industrial market
By Ashley Fahey
Tampa Bay Business Journal
Published: Oct 20, 2021

With record-low vacancy, rising rental rates, intense competition and continued supply-chain headaches, tenants in industrial real estate are having to rethink their strategies.

It takes 80 days for goods to cross the Pacific Ocean and be unloaded, which is nearly twice as long as it took before the pandemic, according to a recent report by commercial real estate firm Lee & Associates. On some days in early October, there were 75 container ships waiting to dock at the ports of Los Angeles and Long Beach.

Retailers that are bolstering their e-commerce capabilities, including Walmart Inc., The Home Depot Inc. and Target Corp., have begun chartering smaller cargo ships that can be rerouted to secondary ports. New partnerships are being formed to get products to customers faster. Retailers are also eating up big blocks of warehouse real estate to keep up with demand.

Third-party logistics firms are also actively competing for warehouse space. A new report by 3PL Central LLC, a warehouse-management software company based in El Segundo, California, found 45% of 3PLs it surveyed said adding warehouses in new locations is one of the most significant opportunities in the coming year. But 21% said finding available warehouse space is one of their biggest challenges right now.

"About 85% of 3PLs are growing right now, which means that’s putting pressure on the warehouse space that they have available today," said Rachel Trindade, chief marketing officer at 3PL Central.

She said the Association for Supply-Chain Management defines a full-capacity warehouse as being about 85% occupied, to allow space for seasonal fluctuations in inventory and for maximum efficiency. This year, more 3PLs than ever are operating at or beyond capacity.

Fifteen percent of respondents to 3PL Central's survey said they're operating beyond 100% capacity. Meanwhile, the share of 3PLs operating above 90% capacity went from 50% in 2020 to 55% in 2021.

Trindade said that's forced 3PL firms to make changes to their warehouse layouts, such as adding racking, relocating slow-moving items to the top of a warehouse and building mezzanine levels.

"They’re looking for surge or overflow places for slower-moving inventory they don’t have to access every single day," Trindade continued. 3PLs are also advising customers they can't hold slower-moving inventory and to focus strictly on faster-moving items.

The struggle to find space is also helping to bolster a relatively new concept, fourth-party logistics, which in which a 3PL will enlist a network of other 3PLs across a wider geographic area. Trindade said, as an example, the firm works with a 3PL in the Southwest that seeks to move into the Southeast but can't find space. In a 4PL structure, an organizer would connect that firm with other 3PLs that may have space to accommodate an expansion.

New lease structures and more proactive approaches to space planning are also occurring for users on the hunt for warehouse space.

Scott Steuber, senior vice president at CBRE Group Inc. in Los Angeles, works with e-commerce companies to optimize their distribution network, including real estate. He said the space search for industrial tenants today is a more multivariable approach than it's been in years past.

"It's also requiring the user and the entity that’s going to occupy the space to know a lot more about their product, customer and supply-chain network," Steuber said.

E-commerce tenants and their advisors are not only identifying the markets that have the availability and with workable rents, but also devising deal structures that allow companies to occupy space quickly, especially with the upcoming holiday season.

Steuber said arrangements such as longer lease terms and taking down larger footprints than what's initially needed — then, perhaps, subleasing excess space until it's required — are more commonly being pursued.

Right now, companies are having to keep up with consumer demand and expectations — such as for fast, free shipping and returns — while also navigating bidding wars for space and labor challenges. Subsequently, companies Steuber works with are getting more sophisticated and employing data-driven approaches to everything, including real estate.

"Dealing with that competition includes securing real estate in markets that can allow you to satisfy your consumer demand, and allow you to find labor that can help you accommodate that consumer demand," Steuber said.