Navigating the Shift: Are Smaller Warehouses the New Norm?

The warehouse market is an ever-evolving landscape, driven by shifts in demand, economic factors, and market conditions. One trend that has been gaining traction in recent years is the move towards smaller and more adaptable industrial spaces.

To gain deeper insights into why this is happening, SIOR had the opportunity to interview Mark Duclos, SIOR, president at Sentry Commercial, and SIOR Global past president. Utilizing his knowledge and experience in the industry, Duclos explores the implications of smaller industrial spaces in the context of the current and future economy.

Warehouse Market in Hartford, CT: A Snapshot

When asked about the current state of the warehouse market in Hartford, CT, Duclos highlights a situation of low vacancy rates, but slower leasing velocity compared to the previous year. One key factor contributing to this situation is the lack of inventory, partly due to a scarcity of new speculative construction. “The high cost of construction and the disconnect between construction costs and expected lease rates have hindered new developments,” Duclos explains. This combination of factors has created a unique landscape in the Hartford warehouse market, potentially reflecting the broader challenges faced by the industrial real estate sector as a whole.

Defining Quality in Industrial Spaces

What makes an industrial space attractive to a potential buyer? Duclos emphasizes that the definition can vary greatly depending on the size of the property. “Much of the traditional spec space in the small warehouse market is leased,” he notes, “leaving older inventory available.” However, this older inventory often lacks the features and amenities required by modern occupiers. In an era where businesses prioritize efficiency, technology integration, and flexible layouts, quality industrial spaces must meet these evolving needs.

With limited inventory and a high-demand market, landlords have a lot to consider when putting industrial space on the market. Determining the appropriate pricing for warehouse spaces involves multiple factors. Duclos explains that the cost of acquisition or new construction does not directly dictate the lease rates. Instead, market dynamics, including supply and demand, play a crucial role in determining pricing. Duclos presents an analogy to expand further. “The tenant pond has water in it,” he says, “it’s just that water is a bit shallower right now. And because the pond is more shallow, landlords, while still in the drivers’ seat, cannot push rates up like they used to.” In fact, lease rates have stabilized or even contracted in certain cases. This disparity between initial rent assumptions and the realities of the market can pose challenges for property owners and investors.

The Industrial Sector: Looking Ahead

Looking beyond the Hartford warehouse market, Duclos acknowledges the difficulty in speaking to the broader U.S. markets specifically concerning smaller industrial spaces. “The smaller space markets are very local in nature,” he states, typically driven by the local economy. Still, in the context of Connecticut and Western Massachusetts, Duclos predicts ongoing shortages of industrial spaces in the foreseeable future. “I believe the disconnect of the cost to build small multi-tenant buildings will require elevated lease rates,” he goes on. “Lease rates that aren’t supported in some (most) markets.”

Embracing the Future of Industrial Spaces

As the landscape of industrial real estate continues to evolve, embracing the trend towards smaller and more adaptable spaces becomes crucial. This shift reflects the need for agility, cost-effectiveness, and meeting the evolving demands of businesses in various industries. Challenges such as construction costs and market disparities can make the industry landscape tenuous—Nevertheless, for those who can navigate these changes effectively, there are still opportunities for success.

ARTICLE CONTRIBUTORS