Warehouse demand compensates for vacant office space

After Ship bob decided last July to let staff work from anywhere, the logistics start-up asked its owner to erect a wall in the middle of its Chicago headquarters so that half the space could be leased to another company.

On March 1, the office reopened at reduced capacity for social distance meetings.

But while it uses less office space, ShipBob’s real estate needs have grown at a breakneck pace. The company, which provides fulfillment services to online retailers, more than doubled its turnover number of warehouses since mid-2020 to 24 locations today, including four outside the United States, with plans to reach 35 by the end of 2021.

The seven-year-old business is a microcosm of the US commercial real estate market. As vacancies have skyrocketed as employers prepare for a post-Covid future of distributed work, the industrial market is hotter than ever due to an increase in e-commerce fueled by a pandemic and a increased consumer demand to get more products at speeds comparable to Amazon.

Vacancy rates in industrial buildings are near an all-time low and new warehouses cannot be built quickly enough to meet the needs of clothing manufacturers, furniture vendors and appliance makers. The real estate company CBRE declared in its first trimester report in the industrial and logistics market that nearly 100 million square feet of space was absorbed during the period, the third highest amount on record, and that a record 376 million square feet is under construction.

Rents rose 7.1% in the quarter from the same period a year earlier to an all-time high of $ 8.44 per square foot, CBRE said. The firm wrote in a follow-up report last month as prices in coastal markets near population centers and inland port hubs skyrocket by double-digit percentages. In northern New Jersey, the average base rent for industrial properties jumped 33% in May from a year earlier, and California’s Inland Empire saw a 24% increase, followed by Philadelphia to 20 %.

“The need to have facilities in these markets, coupled with record vacancy rates, has often led to bidding wars between occupants that drive up rental rates,†said CBRE.

The wheels were well on the move before Covid-19 reached the United States in early 2020. Amazon was already spinning next day delivery in the default option for Prime members, and big box stores like Best Buy and Walmart were rushing to add realization space to try to keep up.

The pandemic has accelerated everything. Consumers were stuck at home ordering more things, while physical stores had to go digital to stay afloat.

Grocery delivery added to the tightness of the market, as Instacart and Postmates were suddenly inundated with orders from customers who didn’t want to walk into a Costco, Albertsons, or Kroger store. Instacart now plans a network of distribution centers loaded with grain picking robots, according to Bloomberg, and Target stepped up same-day processing through so-called sorting centers.

In addition to the rapid change in consumer behavior, the pandemic has also exposed the fragility of the global supply chain. With facilities in China and elsewhere closed, stores have experienced dramatic shortages of clothing, auto parts and packaging materials.

Retailers have responded by securing more storage space to mitigate the impact of future shocks, said James koman, CEO of ElmTree Funds, a private equity firm specializing in commercial real estate.

“The relocation of manufacturing is gaining momentum,†Koman said. Businesses “bring more products to land and need to have room for their products so that we don’t fall into a situation other than the one we find ourselves in now.”

All of these factors are contributing to the price spike, he said. In addition, construction costs are higher due to inflation and supply constraints, and companies are building more sophisticated facilities, full of robots.

“You have these automatic forklifts, these conveyor belts, and these automated storage retrieval systems,†Koman said. “All of this is where the world is going.

Betting on a long-term need for fulfillment and logistics facilities, ElmTree has acquired approximately $ 2 billion of industrial space in the past seven months, surpassing previous years, Koman said. He estimates that the United States will need an additional 135-150 million square feet per year to support the growth of e-commerce.

For ShipBob, the e-commerce boom has played into its economic model. But competition for space simultaneously forces the company to take into account higher costs.

ShipBob works with brands like perfumery Folder, powdered energy drink machine Juspy and Tom Brady’s sports and fitness brand TB12, providing an extensive network of distribution centers for fast and reliable shipping and software to manage deliveries and inventory.

Unlike the retail giants, ShipBob does not tackle large football field-sized distribution centers and only leases a few of its facilities. Rather, he looks for generally family-owned warehouses with 75,000 to 100,000 square feet and some spare capacity. He then equips them with ShipBob technology and pays according to the order volume and the amount of space he uses.

While ShipBob does not sign any leases, it is competing for space in warehouses that are now on much more valuable properties than a year ago. CEO of ShipBob Dhruv Saxena said his business must be located in areas like Southern California and Louisville, Ky., a major transportation and logistics hub, despite rapidly rising prices.

“We need to find ways to bring inventory closer to the end customer even though it’s a lower margin for us,†Saxena said in an interview late last month after her company raised $ 200 million at a valuation exceeding one billion dollars.

ShipBob competes directly with a number of order outsourcing start-ups including ShipMonk, Deliverr and Shippo. These four companies have raised nearly $ 900 million in the past year.

Saxena said one of the main reasons small retailers turn to ShipBob is to avoid the costs and hassle of finding processing space and hiring the necessary workers. He compared it to companies that outsource their IT and data storage needs to Amazon Web Services and pay for the capacity they use rather than renting their own data centers.

“The same calculations apply,†Saxena said. “I can open a warehouse, hire staff and rig the software or I can convert those fixed costs into variable costs that I pay on a transaction basis.”

Nate Faust is in the very early stages of construction olive, an e-commerce startup that works with brands to provide more sustainable packaging and delivery options using recycled boxing materials and bundled items.

Olive opened its first two 30,000 square foot warehouses last year, one in New Jersey and the other in Southern California. Faust, who previously co-founded Jet.com and then worked at Walmart after the acquisition, said if he entered into those leases today, they would easily be 10-15% higher.

Olive is not actively in the market for more distribution centers and is not due to renew its lease until February, but Faust said start-ups must be opportunistic. He works with the real estate company JLL, which he says is constantly on the lookout for attractive spaces.

“We have them all the time because the industrial space is so tight right now,†Faust said. “If we find something perfect for what we’re looking for, it’s not unreasonable to have overlapping leases.”

Vik Chawla, partner at venture capital firm Fifth Wall, which invests in real estate technologies, said challenges in the real estate market are pushing more emerging brands and sellers towards the outsourcing model.

“It is very difficult as a single ecommerce business to try to secure an attractive space and run your business,†said Chawla. “The line of people trying to enter industrial buildings is at the door.”

Many tenants occupying this line are large traditional third-party logistics providers (3PLs), such as CH Robinson and XPO Logistics as well as UPS and FedEx. At the top of the market, Amazon, Walmart, and Target are mopping up the space to speed up distribution and, in Amazon’s case, to handle order fulfillment for its huge marketplace of third-party sellers.

Prologis, America’s largest owner of industrial real estate, said in a May report that utilization rates, which indicate the space used, have reached almost 85%. Vacancy rates are at 4.7%, close to an all-time high, the company said.

Amazon is the real estate company’s biggest customer, occupying 22 million square feet, followed by Home Depot at 9 million, then FedEx and UPS, according to the latest report from Prologis. Annual Report. Walmart is seventh.

In April, an analyst on the Prologis earnings call asked which types of customers were most actively seeking leases.

“E-commerce is a big part of it, but it’s certainly not just about Amazon.” Michael curless, declared in response the director of the customers of Prologis. “He’s definitely the most active customer. But we’re seeing a lot of activity from Targets, Walmarts, Home Depots and lots of evidence that Chinese gamers are also heading to the US and Europe. . “

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