For the modest warehouse, this is a golden age.
Boxy, unadorned and often overlooked, these properties are suddenly in hot demand in many parts of the country, thanks in part to a rise in e-commerce as consumer shopping habits move online. Retailers like Amazon and Walmart are snapping up space once reserved for makers of office furniture and home flooring.
For years now, consumers have been purchasing more products online. In the second quarter, e-commerce sales topped more than $111 billion on a seasonally adjusted basis, or 8.9 percent of all retail sales, according to the Census Bureau. Industry forecasters expect e-commerce sales to continue growing.
Warehouses often reveal little about what goes on within their walls, but the buildings make possible the rapid delivery that consumers now expect from online retailers. They serve as storage and distribution points for products ranging from auto parts to pharmaceuticals. And warehouse jobs have grown rapidly since 2010, forming a critical part of the employment base in communities across the country.
As developers try to catch up, they are considering some unusual solutions, like constructing multistory warehouses and demolishing struggling malls to make way for sprawling industrial properties.
“This is the best I’ve seen it in my 35-year career,” said Craig S. Meyer, president of the logistics and industrial services group for the Americas at the commercial real estate company JLL.
There is relatively little in the way of available warehouse space for rent in many metropolitan regions, especially along the coasts, where land is at a premium. Nationwide, the vacancy rate stood at 5.2 percent at the end of September, lower than the average rate of 8.1 percent over the previous decade, according to JLL. Asking rental rates hit a high of $5.40 per square foot this fall.
Just outside of Cincinnati, two real estate development companies, Al. Neyer and the Hillwood Development Co., recently put the finishing touches on a development called the Hebron Logistics Center. Located on a 49-acre property a few miles from the Cincinnati/Northern Kentucky International Airport in Hebron, Kentucky, the project includes a pair of huge buildings, the larger of which covers more than 589,000 square feet – the equivalent of about 10 football fields – and has 36-foot-high ceilings. The smaller structure measures around 209,500 square feet.
Both buildings, built on speculation that tenants will emerge, are vacant. The developers are betting that with the Cincinnati-area warehouse vacancy rate standing at 3.1 percent as of September, according to JLL’s data, tenants will be eager to move in. The site’s proximity to the airport and the area’s highway network could be draws for tenants, too.
“Cincinnati has historically had low vacancy rates,” said Molly North, chief executive at Al. Neyer. “Certainly, from a developer’s perspective, this calls for more supply. I think it’s also an indication that, as developers, we haven’t kept up with demand in the market.”
Before the project in Hebron, Al. Neyer had not developed a warehouse property in the Cincinnati area since 2007, according to North. As the economy softened, leasing that development was a challenge. The company focused on other real estate projects instead.
Now, the company wants back in the market. Even as they try to lease the Hebron project, Al. Neyer and Hillwood have bought another parcel close to the region’s airport and plan to build two more buildings with 1.7 million square feet between them. Construction on the first building is set to begin in April.
Part of the reason the companies think they can eventually fill around 2.5 million square feet of space is because of Amazon’s plans for the Cincinnati airport, which it will use as an airfreight hub with as many as 2,000 employees.
“We already liked the market before that,” said Kurt Nelson, senior vice president at Hillwood. “But I think it just adds another piece, another opportunity.”
Amazon is having an outsize effect on warehouse developers. By the end of the year, Amazon will rent an estimated 114 million square feet of warehouse space, up from about 9 million in 2009, according to a June note from Jonathan Petersen, an analyst at investment bank Jefferies who follows industrial property companies.
But Amazon faces some competition for warehouse space. Walmart, for example, has increased the number of large distribution centers that support its online sales. And e-commerce operations require three times the amount of warehouse space that brick-and-mortar stores need, analysts say, to guarantee that inventory is on hand and returns can be processed. That means companies with online shopping platforms are going to be on the hunt.
“The last thing that caused a big difference, and this is more macro, was just the growth in trade, the growth in port markets and the move toward distribution and warehousing along the coasts,” Petersen said in an interview. “Then out of nowhere, you have this e-commerce trend. That continues to boost the sector and drive growth.”
This year, developers are expected to build about 225 million square feet of warehouse space, according JLL, about the same as last year’s tally and more than double the 10-year average of 120 million square feet.
One challenge for many builders is finding development sites in or close to dense, built-up cities, where land is often scarce. E-commerce companies need such parcels to guarantee they can quickly dispatch orders to homes and businesses.
Prologis, a San Francisco-based real estate investment trust that owns 380 million square feet of industrial property in the United States, is trying to solve the land riddle by constructing modern multistory warehouses – at least in some markets. These types of properties are not uncommon in cities like Hong Kong and Tokyo, but they are nonexistent here. A property Prologis is building in Seattle will be the first contemporary multistory warehouse in the United States, according to the company.
The building, called Prologis Georgetown Crossroads and about four miles south of downtown Seattle, will span 590,000 square feet over three levels. When complete, it will have two floors designated for product fulfillment. A ramp will wind around one side of the building, allowing trucks to drive to the second floor, pick up or drop off goods and then leave in an efficient manner. The top level could host offices or even a light manufacturing operation.
Multistory warehouses are unproven in the United States, but potential tenants for the Seattle property have been receptive to the idea, said Larry Harmsen, chief operating officer for the Americas at Prologis. The company also plans to develop such a property in San Francisco.
“They’re not just crazy experiments,” he said. “We’re not going to do these everywhere. These really only work in high-density, highly land-constrained environments. The land economics have to be high enough.”
The boom in warehouses could even spell the end for long-struggling retail properties. In Frackville, Pennsylvania, about 60 miles northeast of Harrisburg, the state capital, the real estate company NorthPoint Development believes that industrial buildings are a better use than a moribund mall.
NorthPoint wants to demolish the mostly empty 800,000-square-foot Schuylkill Mall in Frackville, replacing the retail property with two new warehouses that will have more than 1.2 million square feet between them, according to Brian Hansbury, vice president at the Schuylkill Economic Development Corp.
Schuylkill Mall opened in 1980 and once had four anchor retail tenants, including a now-closed Sears and a Hess’s. But the mall has been in decline for years, hurt in part by the rise of online retailers, according to Hansbury. Later this year, NorthPoint will demolish the property, clearing the land for the warehouses it wants to build, he said.
Hansbury thinks the larger of the two buildings planned for the property could work as an e-commerce distribution center. It would be ironic, of course, if an e-commerce company, the type of which helped make the mall obsolete, ended up with an operation on the site.
“It really is kind of a full circle development that’s going on,” Hansbury said. “I can see why some people would be disappointed that they no longer have a mall, but I think what we’re left with might even be better.”