E-commerce and big box industrial are the couple out on the floor that for years have been drawing all eyes with their impressive moves. But e-commerce has another partner on its dance card as multitenant distribution warehouses have become an import part of the logistics supply chain.
Multitenant distribution, or MTD, refers to warehouse and distribution buildings with small-to-medium footprints (usually less than 200,000 square feet), typically with 40 by 40 column spacing and clear heights that are shy of 24 feet.
In other words, these are smaller, older facilities. But this is a feature, not a bug, as MTD warehouses are svelte enough that they populate just about everywhere, including deep within population centers. This makes them ideal for ready-made last mile distribution.
“As branded businesses pursue online orders of their own, companies like Nike and Under Armour want to be able to ship directly to you,” said Jason Tolliver, Americas head of logistics and industrial research at Cushman & Wakefield. “The experience that you have with a company is happening on your doorstep. It’s not happening in the store aisle. So their ability to get your order right, to get your order quickly to you and to get you what you want when you want it is essential.”
Down to the final mile
These final mile facilities, of which MTD comprises an important part of the roster, are really what allow these companies to have the direct connection with their customers. And the urge to better control the supply chain down to the most granular level has made MTD a very attractive asset class.
Market conditions have made MTD among the best performing commercial real estate segments. In 2017, MTD boasted the highest year-over-year rent growth of any property type, according to Cushman & Wakefield research, with a per-square-foot value approximately 20 percent higher than the broader warehouse market. And pricing continues to increase as the segment saw total returns of 13.3 percent in 2017, nearly double the overall commercial real estate return of 7.0 percent.
“Where this MTD product is located is where the e-commerce and omni-channel retailers need to be,” Tolliver said. “It’s greatly supply-constrained, and it creates this environment where you’re going to see increased competition for a really small sliver of space.”
Because MTD skews older, customers still need to perform due diligence and take a close look at the product before leasing or acquiring a space. The paradigm shift that e-commerce has created in the industry has made warehouses big and small as important as a storefront in interacting with customers.
“As the supply chain has become increasingly complex and increasingly closer to the consumer, the complexity of assessing real estate, of advising clients is also increasing,” said Tolliver. “The whole value proposition of that real estate is changing. Do you want just a no-frills warehouse that you’re going to store goods in and then ship, or do you want to mitigate costs to be a true revenue driver for your business?”
David Bitner, Americas head of capital markets research at Cushman & Wakefield, agrees. “It’s a core competitive advantage,” he said. “Look at the archetype, Amazon, which has made fulfilment its sine qua non and everyone else is trying to catch up.”
One representative MTD lease this year was King Solutions taking on a 160,669-square-foot warehouse in Glendale Heights, Illinois. Looking to move into the Chicago market, the third-party logistics provider was undaunted by the building’s age, having been constructed in 1989. The 25-foot clear ceiling height, seven exterior docks, one interior dock and two drive-in doors were all that the company needed, along with the convenient interstate access.
“The warehouse is located in DuPage County which not only provides the proximity to Chicago that our client sought, but also allowed us to secure very favorable economic terms,” said Michael Morgan, executive vice president with Colliers International, who represented the Dayton, Minnesota-based company in the lease.
MTD has recorded the strongest rent growth and highest occupancy rates of all commercial real estate segments, both short and long term. At the end of 2017, the asset class had the highest year-over-year rent growth of any property type. Comparing MTD just to bulk distribution, rents in the former grew 6.2 percent, compared to 4.3 percent for the latter. MTD also outpaces bulk distribution in occupancy rates, 97.3 percent to 94.8 percent, respectively, though both are at historic highs.
The segment has become more mainstream, thus capital sources have changed. The inflow of foreign funds in recent years—which historically targeted office, retail, and hotels in gateway markets—has shifted into MTD. In 2007, private investors comprised 55 percent of all transactions, and offshore capital accounted for only 4.7 percent of investment in MTD. By 2015, however, the share of private investors slipped to 43 percent, while foreign buyers increased their share by more than fivefold to 27 percent.
Traditionally, MTD tenants tended to be local and regional distributors. Could new demand from multinational e-commerce retailers increase rents enough to push those smaller distributors to other product types, different locations or lesser class properties?
According to Tolliver, rent is only one line item that a tenant has to wrangle with. Rising warehouse wages and constricting labor markets have a tremendous impact on a company’s bottom line, as do transportation costs, the specter of higher interest rates and other factors.
“That rental rate appreciation, while it’s certainly been a sticker shock for rents that rolled over the last year or so where the effective rate is jumping pretty dramatically, it’s not something that an occupier is going to be faced with having to go somewhere else because they can’t afford the rents,” Tolliver said. “This is just the cost of doing business.”
Higher, demand-driven rents probably aren’t enough to force most tenants to seek new space if the location was important to them to begin with. E-commerce is moving into MTD warehouses to get closer to the consumer, but local and regional distributors need that access as well.
“If you want to be able to execute your strategy you need to be close to the customer,” Bitner said. “If rents go up 10 percent and it’s either that or damage their strategy, they’re going to pay it.”
Over the past decade, MTD has provided better returns than a number of other commercial real estate segments. Strong rent growth, attractive income returns and sustained investor demand will continue to drive performance in the coming years. The ongoing health of e-commerce means that even in a recession, MTD is unlikely to experience a significant or sustained correction in pricing, making MTD a compelling proposition for investors seeking outsized returns or downside protection.