Warehouse property investments constitute a significant part of the real estate portfolios owned by institutional investors. Successful investments in warehouse and distribution facilities need to take into account metropolitan location considerations, micro-location considerations and product type considerations.
Metropolitan Considerations
When selecting metropolitan areas for warehouse property investments needs to take into account both rental growth considerations and location considerations. In particular, given the prevailing market capitalization rates, warehouse rent levels and sales prices, the investor needs to determine the required warehouse rent growth in order to achieve its minimum required return. In order to do so the investor needs to make some assumptions regarding the entry and exit cap rate, operating expenses, and all the variables needed in order to calculate investment cash flows and use the discounted cash flow (DCF) model for the estimation of the expected internal rate of return (IRR). Metropolitan area forecasts of warehouse rental growth can be obtained from various vendors. Competent forecasts of rental growth need to account for warehouse demand and supply growth prospects and the speed by which warehouse rents adjust to increasing or decreasing vacancy rates.
In terms of selecting metropolitan locations for warehouse property investments, the on-going structural changes in inventory management have clear implications in terms of which metropolitan areas will be favored by warehouse and logistics operators in the years ahead. In particular, it appears that metropolitan areas that are already or are developing into regional distribution hubs will be the ones that will be favored increasingly. This is justified by a convergence of several trends. In particular, a set of forces rooted in the global competitive environment is forcing companies to pay attention to cost efficiency and customer service. Such forces are motivating companies to turn to logistics and seek more efficient ways to manage and decrease their inventories, such as quick response, Just-in-Time, continuous replenishment and so on. The effective application of such techniques encourages consolidation and pooling of outbound shipments and eventually the formulation of distribution network with fewer, larger, and more consolidated warehouses.
Another set of trends that underscore the importance of superior regional transportation and infrastructure, and therefore, the attractiveness of regional distribution hubs to logistics operators, has to do with sourcing as companies buy their supplies from anywhere in the world they can get the lowest price, and the increasing share of transport costs. Increases in oil prices increase the weight of the latter factor in distribution facility location decisions.
Metropolitan areas that are not regional distribution hubs but have strong real inventory and warehouse rent growth prospects can provide opportunities for investing in multi-tenant facilities providing space for localized warehouse and distribution activities.
Micro-Location Factors
Micro-location factors are also important when contemplating warehouse property investments. Not all locations within a metropolitan area are equally attractive to companies looking for warehouse and distribution space. Empirical studies show that locations with better access to interstate freeways, freeway junctions, airports, manufacturing concentrations, high density consumer concentrations, as well as larger labor concentrations, are better positioned to attract new metropolitan demand for warehouse or distribution space. Also industrial park locations are considered as less risky and more attractive. Access to other amenities the may reinforce the attractiveness of a location for warehouse operations include availability of public transportation, accessibility to overnight distribution center, major freight rail yard and a major port, and proximity to restaurants and other worker amenities.
Product Type Considerations
Warehouse property investments need to focus on product types that will be attractive to the firms carrying out warehouse and distribution activities. Such firms can be classified in two major segments: a) the highly competitive segment that includes the best, largest and most competitive companies serving national and regional markets, and b) the evolving segment that includes companies that are partially and slowly applying new technologies and techniques.
The highly competitive firms are the most demanding in terms of the warehouse space they rent of buy and require the highest and latest technological and operational specifications that will allow them to apply the latest and most efficient inventory management and handling techniques. The evolving firms do not necessary seek modern high tech buildings, but are still interested in good functional warehouse space with adequate loading facilities at strong locations.
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