CNBC: Soaring warehouse demand boosts commercial real estate market as office vacancies mount

Key points:

• Because of the growth in e-commerce, vacancy rates for industrial properties are near an all-time low, while utilization is up and prices are at record levels.
• Fulfillment center space is the hottest it’s ever been, while at the same time companies are consolidating offices in favor of hybrid and remote work.
• “We have to find ways of placing inventory closer to the end customer even if it comes at a lower margin for us,” said ShipBob CEO Dhruv Saxena.After ShipBob decided last July to let staffers work from anywhere, the logistics start-up had its landlord erect a wall in the middle of its Chicago headquarters so half the space could be rented out to another company.On March 1, the office reopened at reduced capacity for socially distanced meetings.But while it’s using less office space, ShipBob’s real estate needs have been expanding at a breakneck pace. The company, which provides fulfillment services to online retailers, has more than doubled its warehouse count since mid-2020 to 24 locations today, including four outside the U.S., with plans to reach 35 by the end of 2021.The seven-year-old company is a microcosm of the U.S. commercial real estate market. While office vacancies have soared as employers prepare for a post-Covid future of distributed work, the industrial market is hotter than ever because of a pandemic-fueled surge in e-commerce and increased consumer demand to get more products at Amazon-like speeds.Vacancy rates in industrial buildings are near a record low and new warehouses can’t get built quickly enough to meet the needs of clothing makers, furniture sellers and home appliance manufacturers. Real estate firm CBRE said in its first-quarter report on the industrial and logistics market that almost 100 million square feet of space was absorbed in the period, the third-highest amount ever, 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 that prices in coastal markets near population centers and inland port hubs are soaring by double-digit percentages. In Northern New Jersey, average base rent for industrial properties jumped 33% in May from a year earlier, and California’s Inland Empire saw an increase of 24%, followed by Philadelphia at 20%.“The need to have facilities in these markets, coupled with record low vacancy rates, has often led to bidding wars among occupiers that are driving up rental rates,” CBRE said.
  

  Skyrocketing prices

  The wheels were well in motion before Covid-19 hit the U.S. in early 2020. Amazon was already turning next-day delivery into the default option for Prime members, and big box stores like Best Buy and Walmart were racing to add fulfillment space to try and keep pace.

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

  Grocery delivery added to the market tightness, as Instacart and Postmates were suddenly inundated with orders from customers who didn’t want to enter a Costco, Albertsons or Kroger store. Instacart is now planning a network of fulfillment centers loaded up with cereal-picking robots, according to Bloomberg, and Target has bolstered same-day fulfillment through so-called sortation centers…

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