Remember early in the pandemic when grocery stores ran out of toilet paper and other items? Retailers quickly adjusted to those low inventory situations, stocking up on items expected to be in high demand.
Retailers responded by switching from a “just in time” strategy that kept on hand only what was expected to sell quickly to a “just in case” strategy that led them to stockpile everything from toilet paper to televisions. As a result, the demand for warehouse space skyrocketed, with retailers and manufacturers needing somewhere to store all those goods they assumed they would quickly sell. This led to dramatically increasing rents for available warehouse space and a spike in new construction.
But now, with the stimulus cash gone and people no longer spending boring hours at home online shopping, demand for all those extra items is slipping, and demand for all that warehouse space is expected to drop, as well; but not until retailers can sell off all the extra appliances, furniture and other items they stockpiled.
What does this mean for commercial real estate?
Right now, warehouses are still benefitting from increased demand due to all the extra products retailers need to store. However, industry experts predict that soon the commercial real estate market will feel the same “bullwhip effect” of overcorrection that retailers and the residential real estate market are already feeling.
In a few major markets, including Silicon Valley, Los Angeles, and Long Island, rents climbed as high as $15 per square foot. But, with the amount of new construction warehouse space now nearly double what was built in 2019, we'll likely see an oversupply of warehouse supply, which could lead to a drop in rents and list prices.
What does this mean for investors?
It remains to be seen if consumer buying habits will continue to be high enough to justify retailers stocking all these extra products (and renting the warehouses to keep them in) or if buying habits will return to pre-pandemic levels, leaving unneeded warehouse space sitting empty around the country.
For commercial real estate investors, this is a great time to get educated on the warehouse market and to start looking at other potential uses for warehouses that may no longer be needed. If you're interested in learning more about commercial real estate investing, contact us online or at (347) 389-1682. Attorney Melvin Monachan can answer your questions and help guide your real estate strategy.