In the glamour sweepstakes among property types, warehouse and distribution facilities come pretty low. Unlike an awe-inspiring skyscraper or a dazzling new shopping mall, warehouses do little to capture the imagination. They all look pretty much the same, cost relatively little to erect and are buildings to get into and out of in a hurry.
However, technological innovation is beginning to make warehouses more interesting, according to Property & Portfolio Research (P&PR), a Boston-based econometric consultancy. "A revolution is occurring in warehouse/distribution - perhaps more than in any other real estate asset class," the report says. "The warehouse has recently evolved into an integral link in the supply chain, adopting many of the new technologies available to businesses." Stephen Coyle, head of research at P&PR and author of the report, says three factors have altered the landscape for warehouse and distribution facilities over the past few years, and the first of these is technology. Logistics systems are being installed in warehouses by tenants but they go to the heart of the operating efficiencies that retailers and distributors are seeking to achieve.
Not only are distribution facilities using global positioning systems to communicate directly with trucks and computer-guided fork-lift trucks to shift stored goods, but entire new information systems are being designed for storage. By using automated "pick and pack systems", wire-guided forklift trucks and superflat floors, some distributors can increase the cubic footage that they can use efficiently.
Warehouses now contain sophisticated management systems (WMS) intended to support cross-docking - loading docks facing each other on opposite sides of the long walls of a warehouse - and just-in-time delivery systems, Mr Coyle says. So, what do these new warehouses look like? Typically, they offer, in addition to cross-docking, far more docks than has been customary. "These used to be traditionally eight to 10-dock warehouses," Mr Coyle says. "Now you can see 50, 60 or 100 doors." They also offer far higher ceilings of 28 ft to 32 ft and because of the heights, offer lower dock-to-floor space. Ironically, P&PR says in its report, which looks only at the US market, the growth in just-in-time inventorying has increased demand for warehouse and distribution space. The absolute levels of inventory held have increased even as the length of holding periods have fallen. This means inventories are moved more often, and fewer goods are assembled into a finished product. Therefore, there is a rapidly growing need for more and more sophisticated warehouse facilities.
The second factor changing the warehouse and distribution facility market is the increasing reliance on third-party logistics suppliers. The US's largest retailers, such as Wal-Mart and Home Depot, are typically able to develop their own logistics teams and tend to keep these functions in-house. But for the next tier down, the investment required in sophisticated logistics systems is far too great. These companies increasingly rely on the growing number of professional providers. The third factor affecting warehouse and distribution facilities has been the deregulation of interstate trucking, which has cut costs. This, Mr Coyle notes, may be an obstacle towards the development of a similarly efficient warehousing and distribution system throughout Europe, where government-subsidised rail systems can be a cheaper option. But whatever the regulatory regime, retailers are looking for ways to cut the costs of getting their goods in front of consumers, and increasingly, Mr Coyle says, they seek cost savings from their distribution systems.
Wal-Mart, for instance, has installed satellite communications, global positioning systems and bar-coding systems in its fleet of more than 3,500 trucks and uses database management and automated racking and picking systems. "How big can the savings be?" P&PR asks. "By increasing inventory turns and reducing out-of-stocks, Wal-Mart increased sales of Purina Dog Food by 23 per cent." Increasingly, mass retailers are revising their direct store delivery programmes to move to systems with large centralised warehouses in which 100 per cent of inventory can flow in and out in 24 to 48 hours. Fort Lauderdale, the Florida-based Sports Authority, for instance, hired Andersen Consulting to develop such a centralised supply system. According to RetailTech, a technology magazine for the retailing industry, Sports Authority saved itself £10 million (£6.8m) in store labour, freight expense and inventory carrying costs. But does the surge in demand for new, high-tech warehouse facilities mean they are a great investment? P&PR notes vacancy levels - broadly steady at 7.5 per cent - suggest not. However, unlike offices, which can take 18 to 30 months to complete, warehouses can be constructed in six months, so the sector has low volatility.
However, the data also show that unlike other property types, warehouses are showing demand levels that exceed those of the late 1980s, when property values last peaked. Meanwhile, the data reveal that new starts have been slowing since late 1998, and P&PR predicts the trend will continue over the next two and a half years. The caution, Mr Coyle says, lies in the fact that the biggest demand comes from tenants determined to keep costs down. Thus, warehouse investments will offer perhaps lower returns but on stronger underlying covenants.
On a risk-adjusted basis, P&PR says, warehouses are as safe as houses. Or more, even.
