'There's Just Not Enough Warehouse Space': Florida Enjoying Industrial Sector Boom
The COVID-19 pandemic has wreaked many forms of havoc, but the industrial sector is not among the casualties. In fact, a year-plus of social distancing…
The COVID-19 pandemic has wreaked many forms of havoc, but the industrial sector is not among the casualties. In fact, a year-plus of social distancing and widespread store closures has accelerated an already growing demand for online goods, leaving many businesses in search of one thing: warehouse space.
It’s a nationwide trend that could bring unique benefits for Florida, which is welcoming an influx of people and companies every day who’ll further feed demand.
That means now is the time to be nimble in supplying a need for more at-home deliveries, according to real estate attorney Bruce “Eddie” Lowry, a partner at Bryan Cave Leighton Paisner.
“This area has spiked. The vacancy rates are extremely low, if not at zero, for warehouse space,” Lowry, who practices in the firm’s St. Louis and Chicago offices, said. “I don’t see this ending anytime soon, partly because the older generations, because of the pandemic, have now gotten used to the fact that they can have things delivered to their doorstep rather than having to go into a store, and they understand how to do that now and there’s just not enough warehouse space for that.”
The effects of that will be visible in most urban centers, according to Denice Tokunaga, who’s a partner in Seyfarth Shaw’s real estate department in Seattle, where she focuses on industrial development.
While the lifeblood of the industrial sector used to be heavy manufacturing and other uses, Tokunaga said she’s watched that become distribution and fulfillment centers — which allow e-commerce merchants to outsource their warehousing and shipping.
“Retailers are really making their switch in responding to changes in consumer buying habits. As a society, we’re moving much more to purchases online, more of that instant gratification model,” Tokunaga said. “That was certainly highlighted even more so last year during the pandemic, as many people were shopping from home.”
For many industrial spaces, Tokunaga said, the pandemic has placed greater emphasis on quickly and efficiently ensuring products arrive at stores for curbside pickup, for example.
Developers are therefore looking at urban infill locations, or “mini distribution centers,” as Tokunaga describes them. Unlike the main “battleship” distribution centers, these are built closer to the city center, reducing time spent in traffic and allowing stores to quickly restock.
Tokunaga expects to see these mini facilities get a lot taller, as developers look to accommodate more product within a smaller footprint — something already common in Europe and Asia.
“For landlords on the industrial side, this is the heyday right now,” Tokunaga said. “I think you’re really seeing a new batch of tenants that are competing for limited space, so that they can pivot and respond to this consumer demand by changing their type of operation.”
This trend was already playing out, according to Eric Greenberg, a partner with Seyfarth’s real estate department in Boston, who focuses on the retail sector. But as the pandemic has discouraged shoppers from venturing into the city as often, Greenberg said he expects many shops and restaurants to change how their stores are designed, including deemphasizing their storefront presence to focus on back-of-house operations,
“You may see a retailer, instead of having a 10,000-square-foot clothing store in downtown Miami, have a smaller space because they have less customers that are coming into the store,” Greenberg said. “But they also have many fulfillment centers nearby that can quickly replenish goods if they’re running low on stock, and they can use those centers for direct deliveries.”
Lowry, who focuses on real estate and financing, has also observed that need for more “last-mile” warehouse space, noting the ability to get goods to consumer doorsteps as quickly as possible is now expected from all retailers — not just giants like Amazon. All retailers are therefore considering warehouse space close to population centers.
Related story: How COVID-19 Changed South Florida Retail and Restaurant Spaces
‘Running out of places’
This spike in demand does, of course, raise a logistical issue: Where are all these facilities going to go?
“Because we’re obviously running out of places within population areas to put them. So what’s the next step, and where can clients find that kind of space?” Lowry said. “One solution that has been offered … and it’s happening, but it’s something that seems to be talked about more than it’s actually happening … is the use of defunct malls and retail spaces for these warehousing solutions.”
But Lowry noted there are some major caveats to making that work. Among them: malls are usually structured very differently than distribution centers. Also, the land they sit on isn’t usually zoned for industrial warehouse space, and most towns and cities aren’t thrilled by the prospect of converting their local mall into a warehouse space full of semitrailer trucks.
“However, it is happening, and part of the reason it’s happening is because you can make it look nice and they do create some jobs,” Lowry said.
The industrial boom has also resulted in increased acquisitions of used cargo planes, according to Tokunaga, who said companies are looking to places such as China and Indonesia for planes that still have enough usable life to meet the demands of this home delivery trend.
And anecdotally, James Berger — Berger Singerman’s managing partner, real estate and business attorney — has seen this play out, most recently when he needed to rent a small cargo van to help a family member move some belongings. Berger said he called three or four different rental agencies that told him Amazon, UPS and FedEx had rented all their vans because their delivery demand had increased so much.
“I have a second home in North Carolina and in that vicinity packages are all delivered to the front gate, and they said they were up something like 600% in deliveries year to year, just because people had changed their buying habits,” Berger said. “As businesses shift from brick and mortar, they’re taking on not necessarily the kind of space that Amazon seeks, but they’re shifting to more price-effective office warehouse kind of space.”
Related story: What Florida’s Retail and Industrial Sectors Learned From the COVID-19 Pandemic
‘Astonishing’
Amazon has, unsurprisingly, been the most active tenant in South Florida, making up the lion’s share of transactions, according to Erin Byers, managing director of industrial services at Colliers International.
Byers, who specializes in industrial leasing and sales, represents landlords and tenants in South Florida’s warehousing sector. She noted Amazon isn’t the only group that has needed to grow amid the pandemic.
The two industry types seeing the greatest demand, in Byers’ experience, are e-commerce and home improvement companies. As a result, land prices are rising — a trend that’s continued over the last 18 months.
“The demand for land to develop is really astonishing,” Byers said. “I don’t have a statistic on hand, but they’re trading at over a million to an acre, just for land to be able to develop industrial sites.”
‘Servers can’t go down’
Another hot form of real estate property is data centers, which are industrial-scale technical facilities built to house servers. Those servers hold electronic data, which include images, voice messages, videos, numbers and even “internet of things” data harvested from household appliances.
Lowry said he’s seen a surge in deals around data centers and doesn’t expect that to wane.
“Everyone relies on data in order to make the economy of the world work right now, and so therefore storage of that data securely is an important part of what makes the world work,” Lowry said. “We don’t see that slowing down.”
James “Jim” Grice, who heads Bryan Cave’s global data center and digital infrastructure team, has also clocked that rise in activity, as the work-from-home and e-commerce movements have made storing and processing data even more important.
“We’re seeing a lot of new investor sources showing up, looking at this asset space as an alternative to more traditional real estate sectors,” Grice said. ”We’re just seeing this digital economy, this movement toward completely digital, continue to drive more and more need for server processor units operating the digital economy, the thing that we all rely upon.”
The challenges of that? Data centers are expensive, take up a lot of space and require a lot of continuous energy.
“The unique nature of a data center is that data centers function and are provisioned to function 24/7, 365. Servers can’t go down, right? Of course, all of us hate when the system goes down,” Grice said. ”So, as a result of that, you have very unique terms that document obligations to maintain consistent power supply and consistent environmental conditions, i.e. air conditioning.”
Not only do servers require plenty of power to run, they also have to operate within a specific temperature range, Grice explained, otherwise they’ll overheat or shut down.
That means corresponding lease documents have to balance the risks associated with that, and many wholesale colocation leases will therefore dictate that landlords can’t allow the data center to lose power, even for a second.
“The damages of letting a data center go down as a landlord are punitive. Because you can’t really compensate a credit card processor for the losses of two hours of uptime. When you’re processing hundreds of thousands of transactions a second, what if your servers go down for two hours?” Grice said. “What they do is, they tend to essentially come up with a regime here to make sure that the landlord knows that this is going to be painful if it’s your fault.”
For attorneys to add value for their clients in the negotiation process, Grice said it’s therefore crucial to have familiarity with the market terms for this asset class.
As corporate heavyweights and major companies, such as Blackstone, relocate to Miami, Grice said it’s poised to benefit from the data center wave.
“Florida will probably see benefits on both sides of the issue,” Grice said. “One, they’ll see their fair share of data center development, but they’ll also get the benefit of outbound investment and decision-makers actually locating there.”
And though there’s demand for industrial space across the country, Florida’s vastly-growing population puts it in a good position, the way Byers sees it.
“It’s really kind of unbelievable the influx of capital that’s coming in, particularly from the Northeast,” Byers said. “As more people continue to move to Florida for tax purposes, for weather purposes, for quality of life purposes, from a warehousing standpoint, that demand will continue to rise.”
Whatever’s next for the industrial sector, Tokunaga said COVID-19 has provided valuable lessons for the professionals in its orbit: Sometimes, concessions are necessary.
“You often argue about time periods and schedules, and having harsh remedies if it’s late. But this really highlighted there truly are things outside of a developer or general contractor’s control,” Tokunaga said. “So it’s this balance of accepting those concessions and trying to work through those, otherwise it could have a big effect on pricing.”