Archives for December 2021

Companies that provide a coworking-esque model for warehouse space are growing in demand among industrial users, and it’s not just small businesses driving gains for the sector.

Major retailers and logistics companies, such as Walmart, are making use of flexible warehouse options to help with seasonal surges in space needs, like those that occur around the holidays or the back-to-school season, sources tell Bisnow.

“This is an interesting newer development, larger institutional occupiers using this [coworking-for-warehouses space] for their flexible needs,” Savills Director and Head of Industrial Research Mark Russo told Bisnow.

Companies like Saltbox and Cubework, which provide flexible or short-term leases for users of industrial space, are in growth mode along with the larger industrial sector, which has seen historic gains in the wake of the coronavirus pandemic. However, some industry watchers have reservations about the stability of the business model and a potential lack of transparency for building owners, not unlike the concerns felt by office players over the boom in office coworking.

Russo said the so-called co-warehousing model makes sense for larger occupiers not just during busy shopping seasons, but also as major companies try to insulate their business from the supply chain woes that have spiked over the last year and a half.

“Having the option for excess space as necessary is worth its weight in gold,” Russo said.

The growth in demand for co-warehousing comes amid tight vacancies for the industrial sector, making leasing options scarce and driving rents up.

A CBRE report published this month found that, nationally, industrial users with five-year contracts expiring this year were looking at an average 25% rent increase. Vacancy across the country is at 3.6%, according to the report. In Southern California, by Savills’ count, vacancy is 2.1%, though the figure is lower in some submarkets, like the South Bay, where vacancy is hovering around 1%.

That demand is evidenced by expansion plans of companies that use the coworking concept for industrial space.

One such firm has secured its first Los Angeles location, with plans already in the works for a second location to open next year.

Atlanta-based Saltbox raised $10.6M in a round of Series A funding in the spring of this year for an expansion, and it appears to be putting those funds to good use. The company opened its fourth U.S. location this week in Torrance, where it signed a deal for a 45K SF warehouse.

“LA presents not just an important market for us in terms of accessing the many businesses located here, but it also provides an important node in the national logistics network we’re building,” Saltbox CEO and co-founder Tyler Scriven told Bisnow in an email. Having a presence in LA means members in other locations across the country can more easily access the area’s infrastructure and the large population center here, Scriven said.

Saltbox targets the scores of small and midsized businesses that need warehouse space — but not hundreds of thousands of square feet at a time — or need it on a flexible basis. Saltbox offers warehouse and office space under the same roof, as well as services including daily on-site pickups from a variety of shipping and mail couriers, access to loading docks, a photo studio and conference rooms.

Scriven said that no major logistics or retail tenants have taken up space in a Saltbox location yet, but another provider, Cubework, does count some of these companies among its roster of renters.

Cubework, which is based in City of Industry, is a similar concept also in expansion mode, with plans to add a handful of Southern California locations in 2022, Cubework Chief Commercial Officer Christine Wei told Bisnow.

The coworking-meets-warehouse company has 24 locations in California, 20 of which are in Los Angeles, Orange County and the Inland Empire. Its most recent LA-area location — a 70K SF warehouse in Vernon — opened in mid-2021.  Wei said Cubework is focusing on expanding out of state, especially in Texas, noting “skyrocketing” prices for space here in SoCal, but said she is also touring buildings in the LA area for additional Cubework locations that could be coming as soon as next year.

Cubework locations in LA County range from 50K to 280K SF, Wei said. Though the company works with tenants across a number of industries, the majority of Cubework clients fall into the e-commerce category.

Many of them are smaller, seeking between 1K and 20K SF, but the company has also seen interest from larger clientele, such as Walmart, that need seasonal and holiday storage space, Wei said. Walmart did not immediately respond to a request for comment.

Much of this tenant demand for warehouses has been a result of the pandemic-fueled surge in e-commerce. U.S. consumers spent $612.9B online in the first nine months of 2021, a 16.4% increase from $526.7B in the first three quarters of 2020, a report from DigitalCommerce360 found.

Russo said many large retailers are looking to keep more products on hand than they would in years past to mitigate headwinds caused by the supply chain, which in turn translates to a need for more space.

Despite growth in the sector, some sources who spoke with Bisnow were skeptical about the model, especially in instances where entire buildings are leased by co-warehousing companies, which can make it challenging for landlords to fully understand who is renting space, and how they are using it.

Both Cubework and Saltbox lease space from building owners, with the latter signing management agreements with landlords. This business model, in which shared space providers and landlords share expenses and profits, has been touted by coworking companies as a more stable and cost-efficient growth strategy.

In addition to leasing, Cubework also owns some of its locations.

Scriven noted that finding new locations, particularly in inventory-strapped Los Angeles, poses a challenge for Saltbox, though it also marks a sign that the services are needed.

“Finding space is difficult — but what is hard for us is even harder for our members,” Scriven said. “In other words: the same factors that limit supply of available industrial buildings often drive demand for our product from our members.”

Cubework’s LA County locations are 100% occupied, Wei said, and consistent demand for its product has the company looking to add a handful of new locations in Southern California next year.

“Our spaces are currently full, so we’d like to pick up more buildings,” Wei said.

Source: “Industrial Tenants, Including Big-Box Retailers, Driving Demand For Co-Warehousing Model“

For the fourth quarter, the expectation is there could be a bump on the way for multifamily.

Commercial real estate construction hasn’t had a rebound in the first three quarters of this year despite upticks in other sectors of the economy, said a new report from Moody’s Analytics.

“Completions are off from their recent averages a little over 20% in the multifamily and office markets, and closer to 80% in retail,” Moody’s said it has found.

For the fourth quarter, the expectation is there could be a bump on the way for multifamily, while retail and office activity are likely to remain subdued both in the near- and longer-term.

The research service cites as reasons for the lackluster performance pressure from labor and material shortages, rising wages, and some newly formed uncertainty regarding forecasted economic growth.

During the third quarter, effective rent increased for the second straight quarter in the apartment and retail sectors, while the office sector showed its first bump in effective rent since the first quarter of 2020.

The vacancy rate declined for all three property types.

Apartment rents and vacancies have been helped, said Moody’s, by a slightly limited new supply.

“In particular rent growth in the third quarter registered greater than 7%, a historically significant result and one that has more to do with strong absorption, inflationary pressures, and an overheating single-family market than with slow inventory growth,” the report pointed out.

With more apartments being delivered to the marketplace during the rest of 2021, the feeling of the Moody’s researchers is that rent growth will slow with absorption staying strong.

Office completions for the second quarter came in at just 2.9 million square feet, well below its recent quarterly average of approximately 10 million.

Moody’s said the low supply growth has helped to maintain some stability in office sector performance metrics as effective rents increased 0.1% during the quarter.

In retail, completions continue to lag well below their recent quarterly averages.

The growth of e-commerce was seen as a major factor in developer hesitation, a hesitancy Moody’s doubts will diminish soon.

In the third quarter asking rent increased 0.1%, while effective rents increased 0.3%, as concessions pulled back a bit. The vacancy rate declined 10 basis points for the second quarter in a row, according to Moody’s.

Last month, the firm said multifamily asking and effective rents hit historic highs in the third quarter, while the office sector showed signs that it may finally have hit rock bottom.

Asking and effective rents for multifamily properties nationally registered respective increases of 7.5% and 7.9%, the highest quarterly growth Moody’s Analytics REIS has tracked since the firm started publishing quarterly data in 1999. The increases are also triple the prior record from Q3 2000. Net absorption in the third quarter also exceeded Q1 and Q2 combined, and vacancy for the top 79 metros REIS tracks was down by 60 basis points to 4.7%.

Office vacancy actually trended downwards to 18.2% in Q3, down from 18.5% in the prior quarter.

Source: “Still Waiting for CRE Construction to Rebound“

The national median rent in November was $1,312 this month, still $117 greater than where Apartment List economists predict it would have been had pre-pandemic trends continued.

Apartment rents fell in more than half of the nation’s major markets this month, suggesting a widespread cooldown in a market that’s been buoyed by pandemic-driven shifts in consumer preferences.

Apartment List’s national index increased by just 0.1% in November, the lowest month-over-month growth rate all year. The uptick does come at a time when seasonality normally causes rents to dip, however, and the national median rent has increased by 17.8% since the beginning of the year, a staggering contrast to pre-pandemic averages, which sat around 2.6%.

The national median rent in November was $1,312 this month, still $117 greater than where Apartment List economists predict it would have been had pre-pandemic trends continued.

“With our national vacancy index ticking up for the third straight month, the rental market seems to be turning a corner from the unprecedented rent growth that has characterized most of this year,” Apartment List’s Chris Salvati writes in a new analysis of the November data.

Rents declined the most in Boise, which has been a pandemic hotspot. Prices there were down 3.7% from October to November. San Francisco also saw sharp declines of 2.7%, and is one of the few cities where rents are still below pre-COVID levels. Rents fell by more than 1% in San Jose and Oakland, and rents also dropped in consecutive months in Minneapolis, Boston, Seattle, and Arlington, Va.

On the flip side, North Las Vegas claims the top spot for fastest pandemic-era rent growth, with prices up 38% since March 2020. Rents increased in the suburb by more than 1% last month.

Another big winner: the Sun Belt, especially Tampa, Phoenix, and (again) Las Vegas.

“In these markets the pandemic did not start a new trend, so much as accelerate an existing one,” Salvati says. “Affordability here was waning even before the pandemic ignited a rush of new rental demand.”

Vacancy also ticked up a bit last month to end November at 4.2%

“Although the recent increase has been modest and gradual, it represents an important inflection point, signalling that tightness in the rental market is finally beginning to ease,” Salvati says. “If our vacancy rate continues to increase in the coming months, it’s likely that rent growth will also continue to cool.”

Source: “Apartment Rents Are Falling In More Than Half of Major Metros“

Amid sustained job growth, strong consumer spending, and increased demand for rental housing, the commercial real estate market continued to recover in the fourth quarter, marked by rising occupancy across all commercial property markets. However, the course of the pandemic, including the emergence of the deadlier Omicron variant, will continue to greatly determine the direction and pace of recovery across property markets.

Since 2020 Q2, occupancy in multifamily rental properties has increased by 1.06 million units due to rising rental demand as home prices became less affordable. The median asking rent has spiked to 11% year-over-year, with asking rents rising at a double-digit pace in a third of metro areas, particularly in metro areas in Florida, the Carolinas, Texas, Georgia, Louisiana, Alabama, Nevada, Arizona, and New Mexico, as well as in Utah and Idaho.

In the office market, occupancy increased modestly by 661,338 square feet in the past three months through November 29, with a long way to go to absorb the 132.2 million square feet of office space that has become unoccupied. The fraction of workers working from home continues to trend down, to just 12% of the workforce, but return-to-work plans have been pushed back due to the resurgence of the Delta variant in the summer. The emergence of the deadlier Omicron variant could again push back these plans.

In the industrial market, demand remains strong. The property market has the lowest vacancy rate among the core markets, at 4.2%. Rents are up 7.9% yearover-year. Since 2020 Q2, 681 million square feet of space has been absorbed.

Occupancy in the retail brick-and-mortars is also increasing, as consumers started to shop at brick-and-mortar stores, leading to some market share recovery (market share of non-store retailers slightly declined from 18% in early 2021 to 17% as of November). The vacancy rate stood at a modest 4.6%. Rents rose 2.6% yearover-year. The hotel market also continues to recover, with business and personal travel picking up, as indicated by the rising cost of energy commodities (e.g. gasoline) that rose 49.5% year-over-year in October. The average 3-month hotel occupancy rate rose to 62.6% in October, up from 48.5% one year ago.

In summary, the commercial real estate market has continued to recover on all fronts on the back of the sustained recovery in the job market, increased consumer spending, and workers trickling back to the office. However, the course of the pandemic, including the emergence of the deadlier Omicron variant, will continue to greatly determine the pace of the commercial real estate market’s recovery and of major metro areas (e.g. New York, San Francisco, Chicago, Los Angeles, Washington DC, and Boston) that are still grappling with huge declines in office occupancy.

Read the full issue here.

Source: “NAR November Commercial Insights“