If you’ve seen recent headlines from the Wall Street Journal like “Why Warehouse Rents Keep Going Up While Demand Is Dropping” or “Southern California’s Hot Warehousing Market Is Cooling Off,” we may be asking ourselves the same question:
What in the world is going on with the warehouse real estate market?
The first article cites some interesting—yet baffling—statistics from commercial real estate services firm Cushman & Wakefield:
- In the second quarter of this year, warehouse rental prices reached an all-time high with average rental prices coming in at $9.59 per square foot.
- This average rental price is 16.1% higher than the same period in 2022 and is a result of “a four-year run of rising leasing costs that has pushed the price of warehouse space up 50% since the spring of 2020.”
- However, at the same time, industrial real estate vacancy rates are rising, growing to 4.1% in Q2 compared to almost 3% at the end of 2022 and 3.5% in the first three months of the year.
- Not only that, “newly-leased space fell by nearly 36% in the second quarter.”
It’s been a while since I took basic economics in high school, but I do remember falling demand should result in falling prices. With the current warehousing real estate market, this is not the case. It is truly a conundrum that brings up a new question for third-party logistics (3PL) warehouse companies:
How does this situation affect my business?
Though industrial real estate is cooling nationwide, the market is still extremely tight compared to pre-pandemic levels; the 4.1% vacancy rate may be noticeably higher than earlier in the year, but it is still significantly below the 5% average vacancy rate of 2020. Despite consumer spending shifting from goods to services, driving falling demand for warehousing space from ecommerce retailers, many companies are still competing for warehouse space, effectively driving up rents in certain geographies.
On top of this still competitive (and costly) market for warehousing space, rising interest rates make it even more difficult for 3PLs to lease additional space. The result? Price-sensitive 3PLs are—and should be—wary about expansion right now even though for many, expansion is the most practical way to grow revenue. This brings us to the next question you are probably asking:
What are my options for navigating this seemingly no-win predicament?
Your best option: pivot to fourth-party logistics (4PL).
To take on more customers, you need space, but securing that space on your own is incredibly difficult and expensive in the current real estate market. Instead, 3PLs should partner together to achieve shared goals in a 4PL network.
Creating a 4PL network is advantageous for both parties involved. For 3PLs with additional square footage to spare, partnering with a space-constrained 3PL enables you to open up additional revenue streams by storing inventory and fulfilling orders on behalf of another 3PL. On the other side of this arrangement, for 3PLs needing extra space, partnering with another 3PL and paying to use some of their vacant space is much more cost-effective than leasing, buying, or building new warehouse facilities on your own. Plus, you can sign more customers to expand your bottom line all while retaining the customer relationship for your portfolio.
The best part? Creating these 4PL partnerships is easier than ever before with Extensiv Network Manager. A first-of-its-kind platform, Network Manager enables 3PLs leveraging Extensiv 3PL Warehouse Manager to maintain full visibility over customers’ inventory, order, and transaction data across all the nodes in the 4PL network centralized in the Extensiv hub, without needing complicated integrations. Network Manager allows you to expand your warehouse capacity through technology and with minimal investment: a win-win.
To learn more about our 4PL network platform, Extensiv Network Manager, reach out for a demo today!