Consumers may head online to shop all year-round but the type of goods they buy – and the quantities in which they buy them – vary significantly depending on the season.
For retailers, storing what they need to fulfil customer orders in a market where vacancy rates for industrial property are low and rents are rising, is becoming an increasingly challenging task.
“The busiest time is typically between August when the kids return to school and the frenzied December holidays,” says Matt Powers, Executive Vice President of JLL’s Retail/e-commerce Distribution practice. During this time, retailers need to store a vast array of goods, from the stationery and learning materials required for new school years to the gifts and decorations in the run-up to the holiday period.
“Companies will start getting inventory ready for peak season months in advance,” Powers says. Yet once the rush is done, there’s a lull period when many retailers have less need for storage space.
A squeeze on space
As demand for industrial space reaches an all-time high, retailers with seasonal warehousing needs are finding it harder to secure the space they require. Bricks-and-mortar and online retailers account for a sizeable chunk of the industrial real estate market tenant base; together they held 18 percent of all warehouse leases in 2016.
Across the U.S., the industrial vacancy hit a record low of 5.6 percent in 2016, according to JLL’s Industrial Investment Outlook, which in turn sent rent prices higher. Some local markets were in particular demand – in Los Angeles, for instance, the industrial vacancy rate was less than 1 percent during the last three months of 2016.
With consumer expectations over delivery times increasing, retailers looking for warehouse space naturally want to be close to their existing distribution center infrastructure or near densely populated urban centers of Los Angeles, Chicago, Dallas, Atlanta, New York and others.
But major urban areas are running low on options for Class A warehouse space as demand continues to rise and land values soar, according to Powers. JLL expects that vacancy will be even tighter in second-tier cities as tenants seek out new markets in which to lease warehouse space, while big-box warehouse spaces continue to be in high demand.
And there’s no relief in sight. “Industrial space will remain tight for the next 24 months in the major markets,” Powers forecasts.
Due to the lack of ready-to-rent warehouse space, companies requiring large chunks of seasonal space are considering new construction as a potential solution via speculative buildings – those that are built before a tenant is signed. Because there are fewer second-generation building options available, tenants are forced to consider new construction to acquire any sizeable chunk of quality space.
Some retailers are heading further out – say, an hour from the ideal distribution point – to find seasonal storage space within their budget. But they will face higher delivery costs to get products to consumers.
“Companies need to, as early as possible, develop a strategy and start identifying locations,” said Kris Bjorson, International Director, Retail Distribution Service at JLL. “Another useful tactic is establishing a preferred license agreement which will help expedite negotiations. They may also want to consider paying rent up front, which serves as a point of leverage and incentive to allow landlords to consider the short-term nature of a deal, whereas they typically are looking for a long-term tenant.”
Companies with short-term plans may also need to be prepared to accept a less-than-state-of-the-art warehouse that could have limited dock doors, low clear height and less trailer parking.
“It’s about finding the right balance between space, location and cost, which will be different for every retailer,” Powers says. “With low vacancy across the country – which is unlikely to change anytime soon – it’s hard for a company to find good quality seasonal space. They’re needing to get creative with non-traditional options and locations.”