While big box logistics and industrials transactions have been dominating the headlines over the last few years, a recent Savills/Potter Space report ‘Big Things in Small Boxes’ (and the follow-on webinar hosted by React News) found that unmet demand in the small-mid-box segment (i.e. sub-100k sq. ft.) presents robust opportunities for the medium-to-long term.
A primary reason for this is that these smaller spaces have a much broader range of occupiers than the traditional distribution, e-commerce and manufacturing users of larger spaces – for example, trade counter, office co-location, on-demand grocery operators and ‘dark kitchens’ are all becoming much more prolific. The sheer variety of end-user has, in turn, contributed to record lows of availability. If additional land is appropriately assigned to this segment, there could be an opportunity for growth unrivalled by other sectors.
There has been no shortage of headlines of e-commerce giants acquiring large industrial and logistics assets or investment firms raising multi-billion funds for the same purpose (see EQT’s $2.5 billion industrials target / Ares closing at $1.8 billion) - no surprise given rents in that sector have grown by some 65% since 2011 (over double that of inflation), with land values also booming and driving yields down.
However, rental levels have also grown in the sub-100k sq. ft. space by around 64% in that timeframe, but with current availability levels at around 5% (dropping to 3% if focusing on the sub-10k sq. ft. segment). Given the relative softening in the big box market, there is therefore ample demand and arguably better long-term opportunities in the smaller spaces if investors and developers can find those that are appropriate to provide the high-quality and flexible offering occupiers are demanding.
There are two obvious challenges to this plan. First, is the chronic shortage of supply brought about by a lack of coherent strategy from government to allocate land for small-mid-box development, while it has largely been focusing on big boxes (to an extent, for good reason). However, there is now a more pressing need to keep up with demand, tackle systemic supply-chain issues and to support growth across small (as well as large) enterprise - it feels, therefore, like a substantive governmental shift is inevitable.
Secondly, institutional investors will need to achieve sizeable platforms to meet the return targets of their mandates. There is no doubt that there is a glut of capital ready to be deployed by many of the usual suspects in this race to scale, but the resolution to our first conundrum may not come quickly enough to make available the stock they need.
It has become a thankless task trying to predict the ever-shifting sands of these dislocated market conditions, but what does seem clear is that investors need to be nimbler and more innovative to find opportunity and extract value. If they are quick out of the blocks, they just might steal a march in this somewhat quieter sub-sector.
A large misunderstanding is that the small box market is only for the smaller players in the industry. This simply isn’t the case. Even some of the largest, and most well-known household names are using multiple small spaces to fulfil their requirements.