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Warehouse Prices Benefit from E-Commerce Growth

Warehouse Prices Benefit from E-Commerce Growth

Consumers are breaking online sales records again this year, with the days after Thanksgiving dominated by shoppers using their electronic devices instead of stores for purchases. The trend spurring on investor interest in warehouses leased to e-commerce tenants.

According to the National Retail Federation, for the first time ever more shoppers reported they made purchases online than in stores over that Black Friday weekend. E-commerce sales surged a reported 18.0 percent year-over-year from Thanksgiving weekend 2015, almost doubling the growth from the year prior. E-commerce sales are expected to keep pace for the rest of the holiday season, climbing to a forecasted $95 billion. Package deliveries are also expected to set records in 2016. UPS expects to deliver 700 million parcels at the peak of the holiday rush, about 17.0 percent more than last year, while FedEx says it expects to see deliveries grow by 10.0 percent, to 325 million.

The massive growth in online sales over the past five years fueled the resurgence of the industrial market after the recession, with most large markets now at single-digit vacancies. Most recently, 15 markets saw net absorption increase, 13 saw construction rise and 19 experiences increases in asking rental rates, according to a recent report from real estate services firm NAI Global. Ten markets saw growth in all three areas, NAI researchers report. Nineteen markets recorded positive absorption, with 14 also seeing drops in vacancy, indicating a national trend for industrial space surpassing supply, the researchers noted.

Industrial properties occupied by e-commerce businesses are at the top of investor wish lists. Facilities leased by Amazon and FedEx, for example, have sold at a cap rate two to four times the average 10-year Treasury note rate, according to a recent report by real estate services firm Avison Young. Erik Foster, leader of the firm’s national industrial capital markets group, says Amazon and FedEx are examples of today’s “super tenant” because of the domination of modern warehouse-based retailing in the industrial sector.

Even though e-commerce-occupied properties are generally much more built-out and specialized, they are selling at higher rates than empty shell buildings in prime locations, Foster notes. These new distribution centers are now tricked out with tens of thousands of pallet locations, temperature control, modern flow racks and integrated conveyor systems for rapid sorting, though the additions and associated costs don’t seem to be lowering the price per sq. ft. figures.

“How these new buildings operate is critical to e-commerce, and they are commanding strong pricing,” Foster says. “Investors are clamoring for more of these assets even though they can be even more expensive than a standard facility.”

More than the building, the buyers are looking at the tenants themselves, he says. Amazon, for example, reported that third quarter revenue rose 26.7 percent year-over-year to $29.5 billion. The company accounts for online buying growth even just by itself, as the Seattle firm’s sales figures reportedly made up more than 81 percent of total third quarter web revenue growth. However, the firm is now running out of storage room, and has asked merchants to help handle the demand for warehouse space.

Regardless, Amazon’s properties still command high prices, Foster says. For example, Prologis sold one of Amazon’s recently opened fulfillment centers, a 1.5-million-sq.-ft. building in the Greater Hartford, Conn. Sub-market of Windsor, to Deka Immobilien for $105.5 million in April, at a cap rate of 5.7 percent. Amazon signs 10-year leases for its buildings, and developers put these up for sale at a high premium. The industrial market has multiple Amazon buildings in play, according to Foster, as millions of square feet of space built during the construction boom of the past five years are now available for purchase. Another 15 Amazon buildings are under construction in seven states.

FedEx is also on a growth spurt. Since 2005, FedEx Ground has expanded or relocated more than 500 facilities, and since 2014 the company has built 12 more distribution centers in the United Sates. While Amazon facilities are typically 500,000 sq. ft. to one million sq. ft., FedEx properties are smaller, with the largest around 300,000 sq. ft. However, the 11 FedEx facilities sold this year carried an average cap rate that was almost a percentage point higher than the one Amazon properties sold at, Foster says.

Demand for warehouse properties leaded to e-commerce players will remain high at least through the next year, Foster says. Investors “are sometimes leery when they look at the overall expense of an e-commerce property, which has a lot more costs than the traditional shell, but the message is to look at the long-term business model of the business that has typically grown significantly over the past couple of years,” he says. “That should allay fears of a high initial purchase price.”

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