There’s no question that there is a monumental shift happening in the world of commerce. Much of this is driven by the continual need to cut costs. Retail space which touches the end consumer is still relatively expensive. In fact, rent for a retail business rates among one of its top expenses. Not only that, the density of merchandise per square foot is quite low. After all, you want to be able to browse the aisles and see what you are about to buy without visual clutter. Clutter creates confusion, indecision, and ultimately undermines the buying experience.
We know that e-commerce is gaining market share. It’s not just the convenience of buying online. Even the bricks and mortar retailers are realizing that they need to reduce their retail footprint in order to compete. The purpose of the showroom has changed. It’s now just what’s required to showcase the merchandise, and not to hold inventory. The space is too expensive.
If you want to have a large catalog, and you want to drive a lot of volume, then you need a large space. Customers want to be able to enter a store without feeling crowded. Think of Ikea furniture stores from Sweden that have designed their stores to showcase how to use their product. But the stores themselves relegate the majority of the inventory to an attached warehouse where the product is flat-packed and stacked to minimize the warehouse footprint.
Last month, Colliers International published their industrial market update for the second quarter. This year, despite the pandemic, there has been a market absorption of 104M square feet of industrial space so far in 2020. There is 170M square feet of new supply that has entered the market during the period, and there is a further 314M square feet under construction. The new supply represents the eighth quarter in a row where supply has exceeded demand. Vacancies are trending upwards, despite the robust demand growth. Vacancies were 5.5% for the quarter up by 0.5% from the same period last year. Clearly supply is getting ahead of demand in some areas.
You see, in every sector you need to look at both supply and demand. Some cities have a very large industrial footprint. I’m thinking cities like Dallas and Houston which each have about 896M SF and 615MSF respectively. Now industrial demand breaks down into several sectors, including warehouse, flex, and manufacturing. The growth in the Dallas market in Q2 was 10M SF which represents an addition of 1.1% of the total market inventory in the second quarter. But if you compare with other markets like Austin Texas which only has 56M SF in the entire market, it looks like Austin is under-supplied compared with its population. Austin does have some major players with companies like AMD, Dell, Whole Foods, having sizable industrial footprints. The announcement of Tesla’s new factory in Austin is sure to bring more activity to the market. There is a shortage of industrial zoned land in the community and there is a need for additional last mile logistics space for many e-commerce businesses.
As with any business, you need to understand your customer, and you need to understand the supply demand dynamics of the local market.
Like retail, industrial projects are often tailored to a specific customer’s needs. Making an investment requires a deep understanding of the market dynamics for both supply and demand. Repurposing a warehouse from one customer to another is generally not that difficult. But location is important, outdoor storage is important, turning radius for trucks is important, freeway access is important, and transportation for employees to get to work is important. For example, if the employees in a warehouse need a car to get to work, then they will need to earn more than those who can take public transit.