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October 17, 2018

The relentless rise of same-day delivery has merchants on the hunt for warehouse space close to their urban customer base.

Strong demand has made industrial real estate increasingly hard to find. And even when space is available, it’s typically not found in the city center, but instead in sprawling sheds the size of football fields in the suburbs.

But new technology platforms are emerging that allow existing corporate occupiers to sublet smaller areas of unutilized warehouse space, eliminating the need for companies in need to lease an entire building.

“Because customers today demand such fast delivery when they order online, companies need more smaller locations rather than fewer larger locations,” says Rich Thompson, who leads the global Supply Chain & Logistics Solutions team at JLL. “At the moment, this isn’t really the way things work.”

“The ‘Airbnb model for industrial warehousing space’ allows companies to be nimble enough to respond to seasonal changes and compete in the age of e-commerce,” Thompson says.

Seattle-based FLEXE is the first of a handful of such startups, connecting companies in need of warehousing space and flexible fulfillment options with a network of warehouse partners that have excess capacity and are willing to provide the needed warehousing services.

Transportation and logistics bellwether UPS announced its own warehousing platform, Ware2Go, in August. Warehouse Exchange and Flow Space are also emerging players in the space.

“As e-commerce companies seek to get closer to their customers, many are not able to justify leasing their own facility or it does not make sense given the seasonal aspect of demand, so the flexible model is an option for those companies that simply did not exist before,” Thompson says. “It’s a market niche because companies can now access locations in a new way, which creates greater flexibility and efficiency across the supply chain.”

A flexible solution

Average industrial rents in the U.S. rose by an annualized rate of 6.2 percent in the second quarter of 2018, compared to the same period a year earlier, according to JLL research.

Vacancy, meanwhile, has remained at historic lows. Many of the country’s top logistics markets continue to operate at a sub–3.0 percent vacancy rate, according to JLL research. In Los Angeles it’s a mere 1.4 percent.

According to surveys issued by FLEXE, up to 30 percent of warehouse space is underutilized at any given time. Most lease agreements don’t allow firms to rent out these spaces to those who need it.

A new, more flexible model provides a solution. This is especially true for companies that need a lot of space during a certain season because they can profit off their real estate portfolios during the off season.

For instance, think about a Christmas tree decoration retailer in November suddenly inundated with product, but the space they lease sits unused in warmer months. Meanwhile, a pool-accessory manufacturer is in need of that square footage during summer.

The flexibility also helps companies that lease large amounts of space with the expectation of growing into it over time.

“If a business is forecasting it will grow by 20 percent in four years, and it signs a five-year lease, there is going to be a lot of empty space in year one,” says Karl Siebrecht, co-founder and CEO of FLEXE.

But in order for the model to take hold, awareness needs to increase across the industry, Thompson says.

“The on-demand warehousing market for industrial warehousing is relatively new and most companies are just beginning to understand how it works,” Thompson says. “The other hurdle is cultural. Many companies still prefer to have full control over their operations.”

Still, as more companies enter the space, the flex space model could “take some of the friction out of near-term imbalances or unplanned shocks in supply chains,” says Aaron Ahlburn, Senior Director of Research at JLL. “It could make shipping goods to customers a more seamless process.”

“We expect continued competition for quality space to add pressure on rents through the end of 2018,” Ahlburn says. “Having an access point to move into on-demand, shorter-term or flexible space alleviates some of that and helps make for a more efficient marketplace.”

Click to read more on whether U.S. industry will benefit from the ‘new’ NAFTA.

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Rich Thompson

International Director, Supply Chain & Logistics Solutions

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