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Tenant demand for quality, institutional caliber
warehouse space looks positive both on a current and long-term basis due
to changing tenant requirements. Functional obsolescence, business consolidation
and technological change are creating demand for good warehouse space.
The physical space requirements for many tenants are becoming three dimensional
rather than two dimensional as tenants focus more on cube or bulk area
rather than just square footage. This has created increased demand for
buildings with twenty-four foot or greater clear ceiling heights. Some
users are seeking space with ceiling heights of thirty feet or more depending
on the market and type of product. Material handling systems, conveyor
systems, fork lifts and racking are undergoing significant technological
upgrades so that more inventory can be stored and moved with increased
efficiency. Narrow aisle racking and automated fork lifts are becoming
common for high value product.
These material handling changes require more sophisticated and higher-quality
buildings to accommodate them. Flatter concrete floors with higher tolerances
are required by many tenants in order to effectively accommodate these
new systems. Enhanced fire-safety systems are another requirement of many
tenants and local regulatory authorities. Early suppression fast response
(ESFR) sprinkler systems have become mandatory requirements for some tenants
who have high value or potentially flammable inventory. Most older (pre-1980)
buildings do not have these types of physical features, therefore the
tenants may be forced to move upon lease renewal or earlier. These factors
have increased the demand for newer buildings at the expense of functionally
obsolescent, older properties.
Business and distribution consolidation is also affecting warehouse trends.
In contrast to the expansion of the last twenty years in terms of corporate
size and geography, firms are now merging, consolidating and downsizing.
Whereas the trend previously was to build numerous regional warehouse
facilities, companies now are utilizing fewer, larger buildings. For example,
a company today might consolidate six 150,000 square foot regional warehouse
facilities into one or two buildings of 300,000 to 500,000 square feet.
Improved transportation, computerization and reduced facilities overhead
make this more efficient. This trend creates demand for larger more efficient
warehouse buildings with strong transportation access. Conversely it reduces
demand for the older, smaller and less efficient buildings. A warehouse
investor must be knowledgeable to make the correct investment decisions.
The supply and demand balance for industrial property has typically remained
more in equilibrium than for some other types of property. There are several
reasons for this. Warehouses historically have not been as "popular" with
institutional investors as office and retail properties, therefore, overbuilding
has not been fueled by overinvestment of capital, (although we are keeping
a close watch on this situation in many markets as industrials increasingly
have come into favor with institutions). Warehouses are relatively small
on a per building basis, therefore, investment in office and retail has
been more efficient than industrial from a staffing viewpoint. For example,
an investor could purchase one office or retail complex and invest twenty
million dollars, whereas it might have to invest in five or six warehouse
buildings to invest the same dollar amount. Obviously, if the office investment
performs poorly versus the industrial one then the efficiency advantage
was meaningless.
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