Businesses looking for a warehouse in Rhode Island might be searching for a long time because the exploding growth of online retail has spurred demand in places to stock products while supply chain snags are slowing the construction of new warehouses.
That’s also the case nationally, too, in which leased warehouse space has outpaced vacancies for 46 consecutive quarters, according to a report by national commercial real estate firm CBRE Inc.. The industrial vacancy rate, meanwhile, has had a historic low of 3.6%.
This soaring demand for warehouse space is driven largely by increased e-commerce activity, according to Michael Giuttari, president and founder of Providence-based MG Commercial Real Estate Services Inc.
“Ever since the pandemic hit in March of 2020, there’s just been a huge increase in demand,” Giuttari said. “And it’s all about the direct consumer e-commerce.”
Meanwhile, global supply chain shortages are forcing companies to put more emphasis on keeping “safety stock” at the ready, which requires more storage space. At the same time, the shortages are slowing down warehouse construction projects by months and pushing expenses for building materials higher.
Sourcing delays have led to a shortage of items such as roof fasteners, insulation, dock door rollers and other essential construction supplies, according to CBRE, further hampering developers’ ability to keep up with demand. Curtain wall systems used to clad warehouses, for instance, are booked through 2022 and have a lead time of 10-20 weeks.
Rental rates also continue to surge, which has led to some unusual trends that impact warehouse availability, Giuttari said. Because rental rates are rising so rapidly, some landlords are opting to allow their properties to remain vacant, anticipating that months down the line, they can rent their property for an even higher price.
This wait-and-see approach is adding to the warehouse crunch.
“It’s a very strange time right now where it’s almost like that vacancy, to landlords, is a good thing,” Giuttari said. “Because the rents are going up quickly. The thought is now to sit on it and wait three or six months and see what rents are so you’re not leaving money on the table.”
Steven J. King, managing director of Quonset Development Corp., also observed that this shortage of warehouse space extends across the state, noting, “There’s very limited options available for folks who are looking for space.”
QDC recently added new warehouse space at its Quonset Business Park in North Kingstown as part of its “flex industrial campus,” which officially opened its fourth building on Nov. 15. Each of the flex units provides space that can be used for warehouse, manufacturing or production purposes, in addition to office areas.
While all business activity experienced a lull for about a year after the pandemic hit, King said, the flex spaces – three of which were constructed after March 2020 – were fully leased within six to eight months of completion. Across the business park, large spaces are similarly filled.
“We’ve had limited vacancy here for quite a long time, but it’s really tight now,” King said.
The business park has about 12 million square feet of buildings, with warehousing making up about 3 million to 4 million square feet of that space.
Elsewhere, many projects are springing up near the Rhode Island-Connecticut border due to the availability of land and proximity to Route 395 in Connecticut, Giuttari said.
Rather than being built for a specific tenant, these projects are speculative, “which hasn’t happened in a long time,” Giuttari said, indicating landlords’ increased confidence in the real estate market.
But interest is not limited to the Route 395 area, as developers seem to be seizing opportunities wherever they can. The New York-based Bluewater Property Group is working on a $290 million, 3.8 million-square-foot warehouse for Amazon.com Inc. retail distribution at 2120 Hartford Ave. in Johnston.
Amazon expects the warehouse to be operational by April 2023.
And in late 2020, Milwaukee-based private commercial real estate firm Phoenix Investors LLC acquired the former LEDVANCE LLC plant in Central Falls, with the developer planning to use the site for a new warehouse. A representative from Phoenix did not return a request for comment.
Due to increased costs, smaller companies are largely shut out from building new warehouses spaces.
Over the past decade, construction costs for building a warehouse have likely doubled, Giuttari said.
“To build a 40,000-square-foot warehouse today is going to cost, ground up, probably $6 [million] or $7 million,” Giuttari said. “That’s a substantial amount of money, and either you have it in the bank, or you have to borrow the money, and to borrow $6 million, you need to have incredible money to pay it. Every deal is a big deal in that sense.”
The longer timelines for completing projects also lead to increased interest on loans, Giutarri said, noting that what once could have been a three-month project might now take six months.
With more people than ever ordering products online, Giuttari anticipates the strain on warehouse spaces is here to stay for the foreseeable future.
“Once [customers] figure out all they have to do is hit order on their phone, or on their laptop, they learn how easy it is,” Giuttari said, “so they go from never using it before to first-time users coming back again, ordering more and putting more pressure on the warehousing space.”
Jacquelyn Voghel is a PBN staff writer. Email her at Voghel@PBN.com.
