Is The Industrial Real Estate Market Supply Constrained?

In a recent interview for Estates Gazette I mentioned that part of the premise of Stowga was that there is a lot of spare capacity in the system:

“Any property developer will tell you the industrial market is supply constrained… It might be to their eyes, but it doesn’t mean there is a lack of space, it just means that the space is not very visible. We are trying to unlock that.”

As a result of the article I have been contacted by a number of industrial real estate investors to find out more about how we are thinking at Stowga, and they are particularly interested in this issue of supply.

What I tell them is very simple: you know the vacancy rates, you know the utilisation rates - work it out.

A back of the fag-pack calculation would be something like 5% vacancy rate + 10% under-utilised…. and then apply that to your portfolio, or specific market, or even the entire market.

It’s interesting to observe people’s reactions. There’s a lightbulb moment.

It’s not just that whatever number they come up with is likely to be significant, it’s the realisation that this is just the start. 

Let’s say their calculation was a portfolio of 1,000,000 sq ft. Using the rates above that would mean 50,000 sq ft vacant, and 95,000 sq ft of under-utilised. A total of 145,000 sq ft or 14.5% of the portfolio is not generating its full potential. 

That’s a fair amount. What if that space could be unlocked? What if that space was fully optimised? What would that mean for existing supply/demand models? What does it mean for you and your business? 

The thing we at Stowga are particularly interested in is unlocking value of the services being performed in that space - i.e. business that is otherwise lost. A lot of warehouse space is racked for pallets. Those pallets need handling. Perhaps picking. These are value-add services. That increases the value of that space.

Another thing to consider is what we have seen time and time again when tech-enabled services enter new markets: they seem to be going after a small, niche part of the market that no one is particularly fussed about, but then when they dominate their chosen niche they expand in to new markets and dominate those as well. They offer an improved service that customers get hooked on. As a result those new upstarts slowly eat into the incumbents market share.

AirBnB - literally airbeds in people’s houses when it started. Now a threat to hotels worldwide.

Amazon - an ecommerce store that started selling books. Now hosts the servers that power a vast part of the internet, and also arguably the most important logistics company in the world.

I’m not saying Stowga is comparable to those guys (yet) but regardless, even if it’s not us it is inevitable that someone will crack what we are doing at some point. And when that happens that is going to drastically change the landscape - both the business landscape and physical landscape.

Property as an asset class is not a liquid market. Services however are. 

If supply becomes liquid I guarantee it won’t just be the 5% vacant and 10% under-utilised that will be the total addressable market that will be traded. If the service is there then every company who holds physical inventory will want to switch to this model.

Why wouldn’t they? No long-term commitments, improved supply chain flexibility, better service, transparency and price - they’d be crazy not to.

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People see what they want to see. Each to their own, but what I see everywhere around me is technology changing the way we do things. There is so much evidence of change all around us that I think it naive to think any business is safe from disruption. With warehouses, and indeed real estate in general, development times are long, so who knows what changes could take place in that time - a financial crash, a dictator pushes his luck too far, or a startup gets it right. The world is changing quickly and asset optimisation is a big trend. Maybe today vacancy rates are low and utilisation rates are high, but things are getting peaky and no one knows what’s round the corner. The world could be a very different place before that new warehouse you’re planning opens its doors for trading. 

Next time you hear someone say supply is constrained stop and think about the big picture. It’s not black and white, but I don’t think the warehouse market is as constrained as what might first meets the eye.