Last-mile facilities have been anecdotally hot. A new five-year review from Avison Young puts data behind the inklings.
The market is popular. The Avison review mentions a Wealth Management Real Estate 2022 survey that found “52% of respondents noted last-mile warehouses as the most coveted segment of the industrial market,” a shift from previous versions of the survey where respondents preferred more traditional locations.
A couple of reasons come to mind for the shift. One is that traditional industrial space has become highly competitive. The properties focus on larger tenants that want the most modern designs and facilities to accommodate automation and robotics. Smaller infill spaces are in heavy demand but are also smaller, and so possibly seen as more affordable investments.
Supporting the idea of less expensive facilities for initial investment is “the desire to secure value-add properties and reposition them for future growth,” according to Avison. “This sentiment fits with market activity, as investors turn to older, sometimes obsolete warehouses due to the prospects for rent appreciation in those people-dense areas. In some cases, rising interest rates have also made this type of strategy more profitable than buying newer, stabilized properties.”
In an analysis of industrial property data running from 20,000 to 200,000 square feet across 20 urban markets, Avison found “average prices per square foot have steadily increased by a compounded annualized growth rate of 17.2%, increasing from just over $150 in 2017 to instances of over $300 in 2022.”
As the report suggests, the data require a sprinkling of salt because the number of transactions, even in the largest metro areas, can be sparse and volatile, making a representative statistical analysis difficult. “In our sample set, there were only an average of 50-60 urban industrial investment sales per quarter, across at least twelve U.S. markets and ranging from Los Angeles to Boston, Chicago, and Atlanta,” wrote Avison. “Those properties were roughly 53,000 square feet in total size – as buyers continue to scour the market for the right opportunities and leverage off-market connections to meet yield requirements.”
Many of the properties need additional capital investment, as one might expect with a value-add focus. “Some analysts estimate that each additional warehouse requires a 30% increase in inventory, as well as additional costs to move goods from the supplier to the urban warehouse and store it before sending it off to an end customer,” the report noted. “There also are additional labor costs for receiving and storing goods in these areas.”
There may be some falloff in the demand for last-mile facilities because easing of the pandemic means less upward pressure on e-commerce, which peaked in Q2 2020 at 16.4% of total retail sales and then began to trail off. But by Q1 2022, it was still 14.3%, coming close to what previous trends might have reached without the up-and-down influence of the pandemic. It seems likely that the percentage will again begin to trend upward, meaning a good future for properties that can help close the last mile of delivery.