By Esther Fung
E-commerce is setting off a scramble for industrial real estate near urban centers, giving landlords of once-unglamorous properties a chance to push up rents to record levels.
Amazon.com Inc. and other online retailers, as well as fulfillment companies such as FedEx Corp., increasingly are seeking out "last-mile" locations in urban areas to feed consumer demand for ever-faster delivery of their purchases.
That, in turn, is giving landlords of such facilities pricing power they have never enjoyed before.
On average, U.S. industrial rents stood at a record $5.35 per square foot in the second quarter, up from $5.25 in the first quarter, according to data from real estate services firm JLL.
A well-located last-mile facility "has the functional equivalent of a high-end retail store," said Hamid Moghadam, chairman and chief executive officer of industrial real-estate investment trust Prologis Inc. Such facilities are productive for the tenant and reduce transportation and labor costs.
But they also are scarce, prompting some landlords to get creative. Prologis, a San Francisco-based REIT, purchased the old ABC Carpet building in the Bronx earlier this year to convert to warehouse space. It expects to get rents in the low-$20 per square foot, which would be comparable to some office and retail asking rents in the area.
When a company is shipping to individual customers rather than in bulk to stores, most of their costs are in transportation and labor, and reducing them is a priority, said Eric Frankel, an analyst at real-estate research firm Green Street Advisors. Warehouse rent, by contrast, represents just 5% or so of costs in a supply chain.
"If you think about sales productivity across the entire supply chain, paying a high rent is not a big deal," said Mr. Frankel.
Modest levels of new warehouse supply are coming onto the market at a time when some e-commerce companies are expanding rapidly. Amazon is now the largest tenant of Prologis, Duke Realty Corp., Jones Lang LaSalle Income Property Trust and DCT Industrial Trust by percentage of rental revenue at year-end 2016, according to S&P Global Market Intelligence.
"Consumer purchasing behavior and the rise of e-commerce have shifted in a way that is extremely beneficial for industrial real estate. Proximity of warehouses is more important than ever, and we aim to own properties closest to transportation and consumers," said Phil Hawkins, president and chief executive of DCT in a statement.
Some retailers, meanwhile, are embracing the practice of "showrooming," in which shoppers use bricks-and-mortar retail locations to check out goods they later purchase online. Nordstrom Inc. earlier this month said it is opening a store in West Hollywood, Calif., where shoppers can try on clothes, but the store won't carry inventory. Instead, the merchandise would be retrieved from other nearby Nordstrom locations or through its website.
If the concept becomes more commonplace, it would fuel more demand for more logistics space and services, analysts said.
Other markets where warehouse space is poised to generate premium rents include Seattle, San Francisco, parts of Los Angeles, Chicago and possibly Miami, said Mr. Moghadam, adding that in the future the company might be able to lease 4 million or 5 million square feet of such premium space in each location. All told, Prologis owns about 381 million square feet of space in the U.S.
Warehouses commanding rents near those of office and retail space are highly profitable for landlords in part because the build-outs are cheaper than office or retail spaces, but analysts said it still remains too early for the emergence of a form of classification of warehouses akin to the different tiers of malls in the U.S. as such high-rent deals aren't commonplace.
"It's too small a piece of the portfolio," said Steve Sakwa, an analyst at Evercore ISI, noting that such leasing deals are still few and aren't going to redefine Prologis' massive portfolio anytime soon.
Mr. Sakwa noted that equity investors have already been assigning higher valuations to industrial REITs, with some of their stock prices up 30% in the past year.
Write to Esther Fung at [email protected]