The Meteoric Rise of Warehousing Distribution Centers in 2021
Are you a real estate investor or property owner looking to make sure that your investments in 2021 are sound, yet still have enough upside to justify making a big play? Well, based on what we saw during the lockdown in 2020 and the shifts in industrial property usage, there are many indications that large distribution buildings will play a massive role in the United States economy and real estate market moving forward through 2021 and into the future.
Rapidly growing e-commerce stores due to the shutdown, physical retailers outsourcing their inventory warehousing in order to focus on their primary objective of selling products and staying in business, and the business giant, Amazon, expanding across the country during the previous year have driven the value of warehousing distribution centers up over the past 12 months as strategic locations have become even more valuable than ever
E-Commerce Stores Driving Distribution Center Growth
With the shutdown of many retailers across the nation, tens of thousands of business owners were forced to take their businesses online in order to continue selling their wares and continue putting food on the table. For many, it was a situation that required adaptation and evolution of sometimes multi-generational businesses in order to simply survive shutdowns. One good thing that came out of this fact is the need for distribution centers in order for these retailers to continue storing, selling, and shipping their products. For some of the smaller sole proprietorships this was not too much of an issue as they could simply store inventory in their home or apartment and ship as necessary. However, this was not the case for the majority of businesses.
Companies that had enough inventory to require a storefront were going to need somewhere large enough to store their inventory, and with reduced revenue pretty much across the nation, it was unlikely that every small business owner would be able to lease or purchase an additional space (a warehouse) to store and distribute their products from. This is a need that was noticed by many sharp entrepreneurs and existing distributors, who took the opportunity to begin purchasing and leasing up massive warehousing distribution centers that they could use to store the inventory for dozens if not hundreds of businesses across the state and country, and manage the intake, organization, packing, and shipping of said companies’ inventory to their customers across the state and across the country.
While retail real estate owners were seeing rapid and devastating vacancies across their portfolios, owners of industrial properties suitable for serving as giant distribution buildings were seeing not only stability, but even growth in terms of rental rates and prices per square foot. This has many real estate investors, institutional investors, and large funds moving their target towards warehousing as it shows signs of being a trending market moving forward as many business owners have found out the benefits of shifting to e-commerce have allowed them to run more lean and efficient businesses.
With so many individuals displaced from their jobs due to the pandemic, more people than ever began learning about starting their own e-commerce stores online, and a surge of online business owners were in need of warehouse space for distributing their products to their clientele. All of these factors have come together in the perfect store for warehouse owners and investors, as their spaces are now in high demand to be used for distribution centers and logistics hubs.
Amazon Delivers Everywhere
With the ever-growing corporate behemoth that is Amazon quickly expanding its territory of giant distribution centers into every corner of the country, the need for high-quality massive industrial buildings will only continue to grow. What are they looking for in their distribution facilities? Typically, their target location is within 10 to 20 miles of a major metropolitan statistical area, with a focus on access to arterial roads and highways that provide quick and easy shipping routes for delivery drivers to take orders from the facility to their final destination. Ingress and egress is vitally important for Amazon distribution centers, with heavy truck traffic in addition to smaller box trucks and delivery vans buzzing the building like a beehive at all hours of the day.
With the volume of tractor trailers full of inventory being unloaded at these facilities daily and the number of outgoing trucks as well, it is no surprise that they implement cross-docking on nearly all of their facilities. What is cross-docking and why is it important? Put simply, cross-docking consists of using (oftentimes) software that harnesses artificial intelligence (AI) to determine which incoming shipments need to go on which outgoing delivering truck based on their final destinations and the routes that they will need to drive in order to get there. This is a massive leap forward in terms of supply chain efficiency that has been a game changer for large distributors. Not only is it saving gas, but it also allows them to drastically reduce the amount of inventory that they have sitting idly in the warehouse at any given time. Why is it beneficial to reduce idle inventory in a warehouse made for storing things? Inventory that sits can fluctuate in value due to natural changes in supply and demand, it is at risk of damage should something happen to the building, and it could even be stolen if someone were to break in. By reducing the amount of inventory that sits in the warehouse at any given time and implementing cross-docking, they are able to save an enormous amount on fuel for their vehicles, accrued hours by drivers, and only store the things that they order in bulk to have on hand at all times due to high levels of demand in that specific market.
The purpose of having these enormous distribution centers so close to suburbs is that it allows same day delivery of many essentials, household goods, and non-perishables, so it makes sense that there would be some items that they keep on hand at all times that fall under these categories so that they are ready for shipment. Amazon is the best in the business at determining which items to keep in stock at distribution centers close to residential areas, and has some of the most advanced predictive analytic software in the world to help them do so. The previous year’s lockdowns across the country left tens of millions of Americans dependent on the services of Amazon for everything from toothpaste to bottled water and canned food, and Amazon used this as an opportunity to expand their reach across the country and acquire more enormous warehousing distribution centers for their supply chain to utilize.
Incentives for Industrial Users
There are many Economic Incentives offered throughout the Country for Industrial Users For Example within the State of New York there are IDA’s (Industrial Development Agencies in different areas who offer incentives to qualified industrial real estate purchasers ranging from tax abatements starting at 50-60% over a 12-year period to 100% tax abatement through the PILOT (payment in lieu of taxes) program, developers and real estate investors have more reason than ever to build and buy warehouses and distribution centers in New York.
Other States like South Carolina have something similar such as their FILOT program (Fee in lieu of taxes), and Texas even has Tax Incremental Reinvestment Zones (TIRZ) that allow a portion of annual property taxes to be re-allocated towards improvements in the zone. If you are curious about more incentives for warehousing distribution centers, be sure to check out Industrial Development Agencies that are local to each county and provide local businesses with incentives to assist with acquisition & development, equipment purchasing, maintenance, and other costs associated with starting your warehousing distribution business in New York. Not only is Industry One Global here to be your industrial real estate expert to assist your company with Industrial Real Estate not only in the United States, but across the world.
In summary, large warehousing distribution centers had a surge in demand in 2020 that hardly anybody saw coming due to businesses being forced to go online due to shutdowns, a spike in e-commerce retailers that started their new businesses after being furloughed or let go, and a rapid expansion of Amazon across the country as they grew to better serve the needs of their clients across the country depending on them for everyday essentials to survive quarantine. The soaring demand for warehousing distribution centers was a result of the market adapting to survive something that was out of our control, and the outcome has shown itself to be a solution potentially superior to what we had before. With the path of automation and online sales in our market, the demand for and value of massive warehousing distribution centers is only going to increase in 2021.
