The cavernous rectangular building with views of the gantry cranes of the nearby Port of Newark is not likely to win many architectural awards. But to Nick Kittredge it is “a thing of beauty”.
Mr Kittredge is a senior executive at logistics real estate company Prologis. The 200,000-square-foot facility in the industrial town of Elizabeth, New Jersey, is one of its latest bets on a warehouse gold rush that is being fuelled by the growth of ecommerce.
Rents for industrial real estate — a category that largely comprises warehouses — are rising at double-digit rates in more than a dozen US markets. Vacancies are at historic lows, and new investors are piling into the sector even as other parts of the property industry are softening.
“Demand for industrial in the US is off the charts,” said Revathi Greenwood, head of US research at Cushman & Wakefield. “That market is completely on steroids.”
TH Real Estate, an investment manager, has estimated that total returns for warehouses will be double those of other US property sectors this year. The Pension Real Estate Association is predicting they will outpace other property categories at least to the end of 2022.
In some ways the warehouse boom is the flipside of a retail property market blighted by bankruptcies and store closures as shoppers move online. Demand is so intense that in some markets developers have taken the once-unheard-of step of tearing down office properties to convert them to warehouses.
Erik Caldwell, chief operating officer of XPO Logistics, which owns 813 warehouses — more than half outside the US — estimated that ecommerce now accounts for about 30 per cent of its business. The company is opening an average of two new warehouse facilities each week. “Consumer demand is fuelling tremendous growth in retail and ecommerce,” Mr Caldwell explained.
It makes for heady times for Mr Kittredge, who runs Prologis’s east coast operations, and fellow denizens of industrial real estate, once an industry backwater. They find themselves suddenly bathing in a limelight typically reserved for colleagues from the more glamorous worlds of residential and commercial realty. “We certainly feel that this is our time in the sun,” he said.
At Cushman, some of the top-ranked brokers — a matter of great prestige internally — are now industrial specialists, and have even begun to feature in the company’s annual presentation.
“All of a sudden, it’s sexy to be an industrial broker,” said Andrew Judd, a senior managing director who runs the company’s office in northern New Jersey, sounding as surprised as anyone.
For years, that was not the case. The warehouse market was boringly stable until it was hit by the 2008 financial crisis. A strengthening economy stabilised rents after a few years.
They have since taken off with the emergence of ecommerce, which is fast changing the rules of retail and logistics. Among other shifts, companies are now seeking abundant warehouse space close to their customers to manage an ever-growing volume of “last mile” deliveries that must be made on ever-tighter deadlines.
A retailer that used to ship goods to a store once a week now makes daily deliveries in an effort to keep pace with Amazon, the leading online retailer. Retailers must also keep a far greater supply of items in stock than they did in the bricks-and-mortar era. Several put the ratio at about 3:1. That includes extra capacity to handle the many items that online shoppers return.
“In seven or eight years, you’ve kind of invented a new industry,” said Stan Danzig, a Cushman vice-chair who has been working in the industrial market since 1981.
By way of example, Mr Danzig pointed to New Jersey, where Amazon did not have a single warehouse as recently as 2012. It now has nine. Wherever Amazon goes, its competitors tend to quickly follow, creating warehouse clusters.
While the warehouse boom is pushing up property values across the US, particularly in pockets near large population centres, northern New Jersey may be its Mecca. In addition to its own sizeable population, it also boasts proximity to New York and the bustling Port of Newark.
Developers built a record 9m sq ft of new warehouse space in the state in 2017, and will surpass that with 10m sq ft this year. Rents that averaged just $5.10 per square foot in 2012 have since jumped to $8.47, according to Cushman. They appear to be accelerating, with a 17 per cent increase in the third quarter compared with the same period a year earlier.
Many of the properties are strung along the New Jersey Turnpike, where brokers refer to distinct markets by the corresponding highway exit and rents tend to descend the further south one drives from New York.
These are not the warehouses from Mr Danzig’s early days in the business. Facilities that once spanned 50,000 sq ft now routinely exceed 1m. The quality of the “slabs” they sit atop is vital because of the accumulated pounding from so much traffic. Tenants also demand as much as 40ft in clearance so that they can stack storage shelves high and driveways designed to accommodate the turning radius of dozens of 53ft tractor trailers.
Some of the beneficiaries include logistics specialists such as Prologis and XPO, property investors such as Bridge Development, and New York and New Jersey real estate developers, including Hartz Mountain and even the Kushner family.
In Edison, New Jersey (Exit 10), Dotcom Distribution, a company that was founded in 2000 with 150,000 sq ft now takes up half of an 851,000 sq ft warehouse facility. Dotcom is a third-party logistics company — “3PL”, in industry parlance — that handles ecommerce operations for dozens of retailers, many in the apparel and cosmetics industries.
“We look at velocity — what’s selling?” was how Robert Coon, the vice-president of marketing, explained the business as a group of workers prepared for the holiday season.
The facility measures 650ft across, making workers on the far end appear like specks. Yet Dotcom is perpetually seeking to squeeze more value from the space to try to offset rising rent and labour costs.
One fix is to shift to increasingly narrow aisles — a mere six feet across in some places — that are traversed by wire-guided lifts that allow human “pickers” to scale 40ft shelves to select merchandise for customer orders.
On a recent afternoon, a picker was traversing an aisle, selecting among a wall of hundreds of trays containing men’s underwear in all shapes, sizes and styles. They belong to Underwear Expert, an online retailer that ships its customers a new pair of skivvies each month.
Dotcom may not find much more space in New Jersey. Realtors say there are few greenfield sites remaining. Many otherwise appealing plots have environmental or structural problems that may make it costly and time-consuming to develop.
For Mr Kittredge, such challenges are also a sign of his industry’s transformation. “For a long time . . . the cocktail conversation around warehouses was pretty shortlived,” he recalled. “But now, with ecommerce, there’s just a lot of excitement.”
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