E-Commerce Helps Boost the Demand for Small Warehouse Space

This Article originally appeared in Logistics Brief on November 27, 2019.

Rent rates for smaller warehouse spaces have increased dramatically as the demand for space smaller than 120,000 square feet has increased significantly more than the push on larger warehouse spaces. The market is hot right now for small spaces thanks to e-Commerce growth, and it doesn’t seem to be slowing down.

Demand from logistics and e-commerce companies combined with the wealth of new construction for small warehouses has increased rents on facilities that are 120,000 square feet or smaller by a factor of 33.7% over the last five years. By comparison, large warehouse spaces of 250,000 square feet or higher have only seen 16% rental growth during the same time frame.

Smaller spaces are more difficult to find. The availability of spaces between 70,000 square feet and 120,000 square feet has decreased by 3.9% during that same time, leaving the availability to rest at 7.4%. Availability for such vacant spaces will soon increase as construction continues to provide smaller warehouse spaces. By comparison, the availability rate of larger warehouse spaces between 120,000 square feet fell by 3.4% and currently hovers at 8.6%. The largest warehouse spaces, those that are 250,000 square feet or larger, fell by three percentage points with availability hovering at 8.9%. Availability for smaller spaces falling by a smaller percentage point bodes well for the industry.

How warehouse demand is trending

This report is currently shedding new light on the dynamic that commands the current demand for warehouse space. Realistically much of this demand is driven by logistics providers who are looking for locations closest to urban ports and by e-Commerce companies searching for warehouses located as close as possible to their customers. These e-commerce companies need warehouses from which they can quickly deliver goods not but a few miles away.

A large percentage of the warehouses currently in urban areas are smaller but, the demand is still driven by the number of logistics companies and e-commerce companies that are looking for those smaller spaces which are now a better solution to their company’s needs. A variety of businesses are converting to smaller spaces and the demand for smaller warehouses is increasing not just in urban areas but in suburban areas also.

Rents are on the rise

This demand has put pressure on related industries as well. Developers are quickly putting up the construction of smaller warehouses, a trend that has been on the rise since 1990. New construction for smaller spaces no bigger than 120,000 square feet has increased comparably to about 1% of the existing inventory of such sized space annually since that time. That means it’s increased by 1% for almost two decades. But new construction of larger warehouse spaces, those that are 250,000 square feet or higher, increased by an average of 3% of current inventory for that size annually since 1990. These figures would lead people to the conclusion that larger warehouse spaces were in demand more than smaller spaces.

As a result of these discrepancies in growth and demand, rent for the smaller spaces, those that were smaller than 70,000 square feet, increased from $6.03 per square foot in 2014 to $8.01 in 2019. The rent for warehouse spaces between 70,000 and 120,000 square feet increased from $4.99 in 2014 to $6.67 in 2019.

During that same time frame, the rent for more substantial spaces between 120,000 and 250,000 square feet increased from $4.64 in 2014 to $5.72 per square foot in 2019. And the largest spaces, those that were over 250,000 square feet, rose from $4.09 in 2014 to $4.73 per square foot in 2019.

Industry leaders say that this strong demand for smaller facilities will continue to grow, especially as e-commerce grows. Strong rent growth for these warehouses is expected to continue.

How shippers are being affected

Shippers are going to be affected by this growth in demand and of course, the subsequent changes in rent. You can expect as a shipper to see additional rent growth that is very strong. Accommodations will have to be made for the higher cost of warehouse spaces, something that will more than likely be put onto the shoulders of the consumer.

Wrapping up

Overall, e-Commerce companies are demanding smaller spaces. Inventory is not nearly as large, and items do not remain in a warehouse for very long. Companies are looking to be as close as possible to their consumers and they rely heavily on small warehouse spaces to do that. As this demand for large spaces shifts toward a more modest one, construction on smaller spaces will continue. More importantly, the development will continue near urban areas where sizes have to be smaller because of the availability of space and other constraints. That won’t stop rents from increasing. Developers have seen an increase in rent on smaller spaces thanks to the demands of e-commerce companies, and that is something that is not set to change anytime soon. This is a growing trend, one that has only just begun to make its impact on the industry.