Industrial warehouses - a trend to stay?
What do your mobile phone, your favourite frozen chicken wings, and the last package delivered on your front porch step have in common? They’ve passed by an industrial warehouse. Before arriving at their destination, all the goods produced have gone through the supply chain.
One of their stops are industrial warehouses, including logistics, fulfillment and distribution centres, big box facilities and cold storage warehouses, to name a few.
What are industrial warehouses used for?
Industrial warehouses hold goods from the producers or the manufacturers. They are used to temporarily store products, manage and compile the inventory, prepare orders, pack, weigh, select the carrier and finally ship the order to the point of sale or the end customer.
Steps in the supply chain
- Supply: Obtaining the raw material
- Manufacturing: Transforming raw materials into final products
- Storage: Stocking, organizing transport and distributing products
- Delivery: Getting the product to the point of sale or end customer
Characteristics of industrial warehouses
Like most real estate assets, the location of these industrial buildings is strategic. Location is a key element enabling access to transportation routes. It also allows the warehouses to be as close as possible to the product destination and optimizes freight costs. Some of the newest buildings can have multiple stories, and many have one story with a building footprint of more than 50,000 sq. ft. Height is precious because it increases the storage capacity. Industrial warehouses have building components adapted to the type of product they store.
For instance, refrigerated warehouses are used for fresh food storage, as these products must be stored in a cooled environment before being shipped. Technologies like building management systems (BMS) are used to optimize the operational cost of the installations. Data management and traceability are important to maintain efficiency and align with consumer expectations.
Demand for industrial buildings
Demand for industrial buildings has been strong for more than the last decade. The disruption encountered in the supply chain and the strong need for goods during the pandemic have created a boom in industrial buildings, including industrial warehouses. An acceleration of the contraction of the overall availability rate for industrial buildings has been observed from 2020 to 2021 when new construction started to rise (see figure 1). Notably, the strong demand for industrial buildings has brought the national average asking lease rates and sale prices to levels never seen before the pandemic (see figure 2).
Figure 1: Evolution of availability rate and new supply
Figure 2: Evolution of asking rental rates and sale prices
Multiple demand drivers for industrial warehouses
Throughout the last few years, multiple drivers have contributed to putting pressure on industrial box inventory.
The main drivers observed are:
- Risk management: Since the pandemic, a trend has been observed where the inventory management model has evolved from a ‘’just in time’’ model to a "just in case” model. Enterprises want to secure their inventories and mitigate the risk of having insufficient supplies.
- Align with the client’s expectations: Logistics and e-commerce business leaders have brought new standards. E-commerce consumers expect same-day or next-day delivery, requesting larger inventories.
- Transportation cost: For the last 3 years, we’ve seen transportation costs rising, pushing manufacturers to reduce the frequency of long-distance shipping and increase goods' storage capacities. See figure 3 for the evolution of general freight costs.
- E-Commerce: Strong growth within this industry where warehouses require 3x the space of traditional warehouses due to product variety and reverse logistics.
- Economic stimulus: As seen in 2020, the economic measures taken by the governments and the central banks have increased the consumption of goods.
Figure 3: Evolution of general freight trucking costs
What does the future of industrial facilities reserve for us?
Warehouses are becoming essential in today’s business logistics, serving most of the consumer goods sector. As businesses strive in an economic environment that can hold its share of surprises, as consumers’ expectations are evolving for higher standards, industrial warehouses can certainly help and be one of the solutions to support businesses in achieving better results.
The long-term future of industrial warehouses is promising. However, the industrial warehouses of tomorrow will have to keep improving to be even more cost-efficient and more environmentally/socially responsible.
Article by: Vincent Godbout, Senior appraiser