The inventory of small warehouses isn’t meeting demand
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The inventory of small warehouses isn’t meeting demand
A growing number of businesses are struggling to find smaller warehouse spaces, even though the pandemic-era uptick in warehouse demand has cooled. According to real-estate services firm Cushman & Wakefield, the vacancy rate for U.S. warehouses under 100,000 square feet was 3.9% in the fourth quarter, much lower than the 6.7% overall vacancy rate.
This is partly because in the past five years, developers have focused on constructing buildings larger than 100,000 square feet to accommodate growing e-commerce operations, and small warehouses are often in urban and suburban areas where space is tight and land is expensive.
“Marketplace” host Kai Ryssdal spoke to Liz Young at The Wall Street Journal about how businesses are having trouble finding small warehouses to lease. Below is an edited transcript of their conversation.
Kai Ryssdal: Let’s get a little ground truth here when we talk small or smaller warehouses. What are regular warehouses? And then what are, how big are smaller warehouses?
Liz Young: Warehouses can obviously run the gamut in terms of size. They can be quite small, as in 1,000 square feet, and they can be the million-plus-square-foot buildings that we see on the side of highways. I looked and set the definition of a small warehouse as anything under 100,000 square feet. Now, of course, that’s still quite large, but compared to the whole gamut of what’s happening with warehousing, those are considered quite small.
Ryssdal: OK, now let’s talk vacancy rates. What’s the difference between, you know, above and under 100,000 square feet?
Young: The overall nationwide vacancy rate in the fourth quarter was 6.7%, which has been climbing quarter over quarter. And what I found was that the vacancy rate for U.S. warehouses under 100,000 square feet was 3.9% while buildings that are more than 100,000 square feet had a 10.1% vacancy rate.
Ryssdal: OK, how come?
Young: A few different things. There’s a lot of demand for smaller spaces, especially as companies get more careful about their leasing decisions. There’s general economic uncertainty. A ton of companies expanded quite a lot during the pandemic, and so companies have since kind of dialed that back. So if they’ve taken on more space, they’ve looked to take on smaller spaces. At the same time, that kind of frenzied pace of expansion during the pandemic prompted a lot of real estate developers to say, hey, we want to get in on this. And they started building warehouses. But almost all of those have been concentrated in that “large” category.
Ryssdal: During the pandemic, we did stories out there — 35 miles east from Los Angeles, 40-ish. When you get out to the Inland Empire in Riverside County, there’s warehouses all over the place, and they’re huge. And now they want smaller ones that I’m gonna guess are closer in, right? It’s that whole last-mile thing.
Young: Absolutely. So a lot of these properties, when they’re smaller, are closer to cities. So they might be in urban areas themselves, they might be in suburban areas, and that means space is tight and land is expensive.
Ryssdal: So talk to me about the retailers who want these smaller spaces you talked about in this piece, Half Price Books.
Young: Half Price Books is a discount secondhand books retailer. They have stores across the country. They have kind of localized so that mostly they fulfill orders out of their stores, but they like to have a little bit of warehouse space, especially in certain markets, to have extra stock on hand. So one example of where they’ve run into this problem with a shortage of small warehouses is that they’ve been looking for a new warehouse in the Twin Cities region of Minnesota for more than a year and haven’t been able to find anything.
Ryssdal: So what are they doing? I mean, it’s not like they can go to one of those, you know, maybe they can, one of those self-storage places and rent, like, a storage garage.
Young: They are, in fact, using temporary storage. And they also are just doing what we all do with our homes, right? If you run out of space, you start to go through and think, OK, what can I get rid of?
Ryssdal: What about the biggies? Because the biggies have that whole, you know, we’ll-get-it-to-you-in-three-hours thing. And it’s not like they’re driving from Riverside County to my house in LA and think three hours even on a good day, you know?
Young: A lot of the big companies, of course, are the ones driving up demand for this space. There’s also companies that specialize in renting out, you know, if a company has an extra 100,000 square feet in their own warehouse, but they’re not using it, there are companies that then come in and connect, you know, somebody who wants that space with the company that has it.
Ryssdal: So as the person on this call who specializes in supply chains and logistics, what’s your sense of how companies are feeling now, given the economic agita that is out there and seems to be on the horizon, and what these companies are feeling in terms of their supply chains and logistics and how they’re going to be able to do business?
Young: I think that this is creating a stressor. I think they need the space. There’s uncertainty about when construction will pick up in this category, and they don’t know what they’ll do without it. So I’m sure that some of them will have to think differently about their supply chains and organize things in a different manner because they’re unable to get the space that they feel they need.
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