Warehouse SpaceDemand Boom: Drivers of New Market Dynamics

The New York metro warehouse space demand boom continues—driven by several factors. The COVID-19 pandemic has decimated the US economy and hit real estate especially hard—but not in every sector. In fact, the market for warehouse space in the New York metropolitan area is growing. Ecommerce has seen already accelerated demand growth to warp speed. With people sheltering in place, buying online is a necessity–and has become a source of entertainment. Moreover, COVID-19 has other impacts of warehouse space demand that are not so obvious—all of which are driving the market dynamics for warehouse space.

Ecommerce volume is exploding

One of the major drivers the warehouse space demand is Amazon. The company announced a record-breaking—record-smashing—second quarter. That included record:

• Revenue of $88.9 billion
• Operating cash flow of $51.2 billion, up 42%

It isn’t just Amazon. Walmart, Target, CVS, and other retailers are rapidly expanding their ecommerce offer, with increased hiring and warehouse space.

Fatter Inventory Requires More Space

Growing ecommerce activity is just one factor that is driving demand. Also significant is a change in the supply chain philosophy. Just-in-time inventory was once the goal because it minimized the cost of financing and storing items. Cross docking from supplier to customer may have minimized costs, but it also left the supply chain vulnerable to disruption. During the COVID-19 market shift, retailers and distributors lost revenue due to extensive out of stock conditions—often with long lead times to replenish. Businesses now recognize the need for “safety stock” and that requires more space. “There’s this move away from just-in-time [inventory], so the tenants are getting fatter,” Kevin McGown, an industrial real estate advisor, told The Wall Street Journal.

Social Distancing Drives Layout and Space

Keeping workers six feet apart is the last factor driving the warehouse space demand boom in the New York metro area. Once driven by efficiency considerations exclusively, warehouse layouts now need to accommodate health and safety factors related to COVID-19. Spacing employees often translates into the need for more warehouse space. Ecommerce is not the only user of commercial warehouse space, yet it is having an outsized impact on market price and vacancy dynamics. Prior to COVID-19, about 35% of industrial leasing was e-commerce related. Now it is over 50%, according to a warehouse space demand report from JLL, commercial real estate services firm. JLL. They are predicting the country needs over a billion square feet of new warehouse space in the next five years. Taken together, these factors point to a tight market for commercial warehouse space in the New York metro for years to come.