Prior to - and during - the COVID-19 outbreak, the United States has experienced an uptick in pressure on supply chains due to the massive growth of e-commerce. From an industrial real estate perspective, this increased pressure presents tremendous opportunities for upward expansion, that is, embracing vertical growth in industrial spaces.

While multi-story industrial spaces have become the new normal across much of southeast Asia, this “going vertical” concept remains fairly novel throughout the United States.

In the following article, I’ll outline seven reasons why industrial real estate investors should focus on modernization via vertical growth to meet the growing demands of warehousing- and delivery-related tenants. Specifically, I’ll dive into each of the following topics:

● An Overview of E-Commerce Logistics Demands

● Reason 1: Embracing the Future

● Reason 2: Hub-and-Spoke Speed

● Reason 3: Optimizing Limited Space

● Reason 4: Height/Technology Symbiosis

● Reason 5: Capital Market Forces

● Reason 6: COVID-related Demand Changes

● Reason 7: Tenant Preferences

An Overview of E-Commerce Logistics Demands

As stated above, the massive growth in e-commerce has altered the delivery landscape in the United States. Of note, the rapid growth of final-mile distribution has proven a key driver of demand for industrial warehouse and distribution facilities in America’s cities.

And, while this final-mile growth has occurred throughout all US cities, the largest markets and points of entry remain undersaturated in terms of industrial real estate to support these demands. Of particular concern, most existing warehouse and distribution real estate surrounding these major markets lacks both the capacity and modernization necessary to meet e-commerce logistics demands.

While these shortcomings create operational challenges for industrial tenants, the shortage of modern warehouse space also presents a tremendous opportunity for commercial real estate investors willing to embrace the strategy of going vertical in warehousing and distribution spaces.

In the following sections, I’ll cover seven reasons why embracing vertical growth in modernizing warehouse and distribution spaces will support both A) the demands of industrial tenants and B) the goals of commercial real estate investors.

Local commercial real estate professionals can help you identify the ideal industrial warehouse property for your market and unique situation - need help finding reliable ones in your area? Drop us a note!

Reason 1: Embracing the Future

As e-commerce has become the new normal in the United States, same-day and one-hour delivery models will drive demand for near-urban and urban warehousing to support these delivery models.

Consumers want things to arrive yesterday, so e-commerce companies and related delivery entities will need the industrial real estate space to meet these accelerated timelines.

Reason 2: Hub-and-Spoke Speed

E-commerce giants in the United States have embraced a hub-and-spoke model, with massive distribution centers pushing goods to urban and near-urban final-mile facilities. The smaller these final-mile facilities, the more frequently they need to be restocked - costing time and money.

By increasing the vertical capacity of these spokes, e-commerce companies decrease the total time from hub to spoke to consumer.

Reason 3: Optimizing Limited Space

Paraphrasing the old real estate adage, they’re not building any more land. As such, optimizing current warehousing space becomes a simple economics question.

As e-commerce delivery pressure grows, the demand for final-mile warehousing and distribution facilities will continue to grow, while the supply of actual industrial space in those high-cost urban centers will remain largely static.

By incorporating vertical growth into the current supply of urban core warehouses, commercial real estate investors can continue to support the needs of e-commerce companies while adding value to their own portfolios.

Feel free to drop us a note if you need help analyzing warehouse vertical space needs. This analysis can seem challenging, and we’re happy to help!

Reason 4: Height/Technology Symbiosis

As e-commerce distribution centers implement high-tech solutions (e.g. cloud-based management, internet-of-things, warehouse robotics, sensors, etc), height demands have increased. Put simply, technology has increased efficiency by allowing the automation of vertical stacking and movement, but that efficiency remains constrained by the actual clear height of a space.

As such, legacy warehouse spaces stand to benefit from vertical growth, as this growth facilitates increased automation, a key demand of modern industrial tenants seeking to meet the needs of e-commerce consumers.

Reason 5: Capital Market Forces

The above technological advances correlate directly with changes in capital markets. Specifically, legacy warehouse owners unwilling to overhaul their spaces have more and more frequently sold to investors.

Seeking increased efficiencies to drive ROI, these new investors have begun pouring capital into modernizing - and therefore increasing capacity within - legacy warehouse space.

And, this cash flow into legacy industrial space will likely continue as interest rates remain historically low.

Reason 6: COVID-related Demand Changes

I can’t discuss warehousing without also discussing the massive impact COVID-19 has had on this type of commercial real estate. Private and public hospitals, municipalities, state and federal governments now all require massive stockpiles of emergency medical equipment.

And, meeting these demands requires significant modernization (due to cold storage requirements) and capacity growth in legacy warehouse spaces.

Regardless of what happens with COVID-19 in the near term, these emergency preparedness demands will remain for the long-term.

Local commercial real estate professionals can provide insights into market-specific demands for industrial tenants - need helping finding reliable ones? Drop us a note!

Reason 7: Tenant Preferences

Lastly, industrial tenants continue to drive the transition towards vertical growth and modernization in warehouse and distribution spaces.

Bottom line, as e-commerce continues to gain market share, these tenants expect both higher quality buildings and the greater vertical capacity to A) support increased automation, and B) increase total warehouse space near urban cores.

Investors who embrace this reality will reap the benefits of increasing value in the warehouse/distribution spaces, especially in larger markets and ports of entry.

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We recognize that, even after outlining the above information, pursuing a new strategy with industrial real estate can seem daunting.

That’s why we’re here to help. The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!

Modernizing Industrial Real Estate | 7 Reasons to Go Vertical