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Warehousing's Impact on Residential Real Estate Investors


Jul 15, 2020 by Brad Cartier

Over the past two quarters, warehousing has fared well compared to other real estate sectors. Thanks to e-commerce and consumer giants like Amazon (NASDAQ: AMZN), Shopify (NYSE: SHOP), Walmart (NYSE: WMT), and Wayfair (NYSE: W), to name a few, warehousing and logistics have become more critical to our economy and supply chain than ever before.

Even before the pandemic, warehousing was a thriving industry, with new developments coming online on a regular basis and demand far outstripping supply. Real estate investors can position themselves to take advantage of the significant economic and commercial benefits of these massive warehousing developments.

Here's an overview of warehousing's impact on residential real estate investors, the pros and cons of using warehousing anchors in your investing location choice, and whether real estate investors should try to get in on the action.

Warehousing: the data

According to CBRE (NYSE: CBRE), demand for warehousing in 2019 far outpaced development. Since 2015, demand for warehouse space has outstripped new constructions by 169 million square feet, and rents have increased by almost 20%. This is equal to an aggregate annual net asking rent growth of 7.8%.

The best candidates for occupying new warehousing locations include e-commerce, food and beverage, wholesalers, and third-party logistics.

According to a recent study by Prologis (NYSE: PLD), an industrial real estate investment trust (REIT), retailers grew their logistics footprint historically at an annual rate of 6% to 7%. In 2019, this went up to 9%, and the 2020 pandemic will likely further accelerate that growth.

"Online order fulfillment requires more logistics space because 100% of inventory is stored within a warehouse (vs. store shelves), which allows for greater product variety, deeper inventory levels, space-intensive parcel shipping operations, and additional value-add activities such as processing returns," the report notes.

Anchoring an investment to warehousing

Finding new warehousing developments is as much art as science. You need to know your local market as well as the major employers and be up to speed on what retailers and e-commerce players are thinking in terms of future development. This is not an easy task.

Find out first where the nearest warehousing developments are in your city and state. Perhaps they're not strategically located enough to warrant strong demand for warehousing. Over the past few years, where were the three largest warehousing developments closest to you? You can find these answers by speaking with a local commercial real estate broker or using software tools such as CoStar (NASDAQ: CSGP).

Typically, warehousing developments will want quick access to major transitways and be near or in between key urban markets. There will only be a few key areas in each location that fit this profile, so get to know the ones near you. There could likely already be warehousing in those areas. Once you've identified these areas, you can begin to conduct your analysis and due diligence on resale rental properties or land for potential residential development.

All that said, you don't want the warehouse to be the sole employer in your area. Single-employer locations are riskier investments as the departure of that anchor employer can have a dramatic impact on your real estate value.

The bottom line

Find out which areas in your investment markets have seen an uptick in warehousing interest and development. Or, conduct some analysis to better understand which areas are prime for these types of businesses. Once you've done this analysis, you can then consider anchoring some investment properties to ride any forthcoming positive economic wave resulting from increased warehousing.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. bradcartier has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Shopify, and Wayfair. The Motley Fool recommends CoStar Group and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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