Industrial Property Ownership
Previously frowned upon as an asset type, industrial real estate has quickly risen to be the darling of the real estate industry. Much of this can be attributed to the so-called “Amazon effect.” While malls are dying alongside brick-and-mortar retail, there seems to be warehouse space built, re-created through a property repurposing, or newly occupied in place of the shuttered retail locations. The saying is every time a store closes, a warehouse opens. These days it could not be more accurate.
Apparel and other goods are being purchased online as opposed to physical locations. The most profitable apparel companies are those who have followed the consumer trend of online shopping. Nike sells more than one million pairs of shoes per day, and this has been a trend in sales production for years. However, maintaining these numbers has resulted from a shift to DTC (direct to consumer) sales, which are achieved by cutting out the middle man. Sales are generated directly from the manufacturer to the consumer while avoiding intermediate channels such as brick and mortar stores, third-party retailers, marketplaces, malls, and other in-person shopping avenues. Large companies love this trend as it increases their margins drastically; therefore, they are doing everything they can to support this trend and help it thrive. Nike has grown its DTC business to $4.3 Billion, marking a 23% growth in this sector for the company. E-commerce for the company grew 31% last year.
Similarly, Urban Outfitters has found itself atop the list of most profitable retailers for similar reasons as Nike. Urban Outfitters and their affiliated brands saw a rapid increase in online sales. During the 4th quarter last year, the company saw a 73% increase in sales over the same period the prior year. They achieved this by focusing on online sales and customer desires for quick shipping time. While the company did increase actual employment and shifts within warehousing, they also increased the number of physical warehouse locations, which drastically improves delivery times, to the tune of 15% for the company. Sales volumes increased immediately as a result of customer desires for this increased service.
This shift in consumer shopping habits extends to other industries as well. Today’s consumers even purchase furniture online many times, without ever visiting a showroom. Clothes, home goods, and just about every item is purchased site unseen by consumers. Online shopping has become so enjoyable that it rivals the in-person experience. The modern consumer is used to buying online, and if they have the option to do so, they are likely to pick that option over in-person shopping, assuming all else is equal or close to equal. Regional warehouses have been supplemented with localized warehouses close to population centers continually stocked with goods, allowing for the continuous support of these trends.
To the surprise of many, groceries are now even being purchased online. While the initial set up for grocery delivery took years to appropriately stock warehouses, deliver goods (such as eggs), and convince the customer to consider this option, it seems to have finally stuck with the consumer. The trend has partially been attributed to technology but also convenience. With the popularity of these types of services has come the ability to offer shipping to consumers at a lower cost. Warehouse space is cheaper to rent than retail space. Therefore the goods are often cheaper online. In addition to these trends, consumers want their items quickly. The modern consumer is impatient and is willing to pay for their items to arrive immediately, which has fueled the new current demand for last-mile warehousing close to population centers. Recent events in the world have only fueled this fire. Before the 2020 coronavirus pandemic, e-commerce represented only 16% or so of retail spending, with growth year over year around 2% and increasing. Since the pandemic began in March 2020, this e-commerce representation of retail spending skyrocketed to 27% with no end in sight. People have adapted to technologies and seem to prefer avoiding crowded store lines and other retail trips that may well be a thing of the past.
What does this all mean? It means your industrial space is extremely valuable. Valuations for industrial properties have been pushed to the forefront of the entire industry. Demand is immense almost regardless of the market. Industrial space is being built, and properties such as malls are being torn down and replaced with warehouses. Regional warehouses now are required to be supplemented with more localized smaller warehouse locations, sometimes located even in retail locations. If you are fortunate enough to own a property and decided to sell it, you will have a line of bidders at the door. If you are a tenant looking for space, you will need to elbow out your competitors to get in the door and stay in your space when your lease is close to expiring. With trends the way they are, this doesn’t seem to be likely to change in the coming years. A global pandemic did nothing to slow down these trends. In many cases, it only increased them.
What happens if you lose this space? Not only do you lose your competitive edge but also your status in the marketplace. You may not be able to find an equivalent building and more than likely not very close to the cost of your original occupancy. Because of these reasons, we need to guard against any potential disasters; this includes fire damage. Many new modern industrial warehouses have sophisticated fire protection systems such as ESFR sprinklers and other items however, we must not forget that most people cannot afford and do not occupy the top-end modern constructed properties. Many warehouse spaces feature not only dated looks but dated fire protection systems. Some of these properties might not even meet current building codes if they were not allowed to be grandfathered in. Even if a property is code compliant, it does not mean the property is genuinely safe from a fire. Many occupants today are cramming in a significant amount of material through vertical storage and sophisticated warehouse layouts. These things create both efficiency and cost savings for the operation but often sacrifice fire safety.
Whether you are planning out your warehouse, purchasing, or leasing a new space, a fire safety evaluation is critical. Just like you need to inspect your car periodically, you need to examine your operation and fire safety to keep all risks and nightmare occurrences at bay.
There are a variety of methods to ensure you are protected appropriately. While we certainly recommend specific plans, coverages, limits, and inclusions, our team prides itself on making that only one facet of our entire business insurance plan. We also create recommendations for your operations, fit-out, building attributes, and occupancy. Contrary to common belief regarding warehouses, not all locations are created equal, especially from an insurance perspective. In the 1980s, there was a warehouse construction boom. Many of those warehouses are still in use today and represent great locations for potential occupants. However, like any older product, they have their downside. Many of these warehouses have not aged well. In particular, many of them are built partially or entirely of wood. Even if only the roof and truss are wood, it can create issues. Wood buildings are extremely challenging for industrial uses. Of course, they are much more of a fire hazard than concrete and metal structure alternatives. Some occupants will not even think about occupancy in these buildings. Those who do will see much higher costs on their insurance bill.
Construction materials are not the only item that will dictate insurance costs. Sprinkler systems paired with the entire fire suppression system are equally as important. Unbelievably many buildings today still do not have sprinkler systems. Some areas of the country do not require them for small buildings or have grandfathered in buildings and/or occupants who existed before the current fire code. Having the wrong fire suppression system may not stop you from legally occupying a property, but it will become costly in other ways. From an actual safety perspective, it can undoubtedly present substantial risks to the occupants and their employees’ safety as well as any goods. In the event of a fire, goods protected by the wrong sprinkler and fire suppression systems are much more likely to experience a complete or partial loss. Sprinkler systems react and interact differently. Some will be more effective in isolating and stopping a fire than others. These differences will dictate the actual liability level for insurers and those they insure. Using a poorly designed or installed fire suppression system can increase annual insurance costs in the hundreds of thousands or even millions of dollars, depending on the occupant’s size. Other fire suppression items come into play as well. Simply keeping additional fire extinguishers on-site and ensuring all exit signs have active lights and batteries will often result in cost bonuses for occupants.
Curious about how else can you lower your commercial insurance bill? Here are a few tips:
Security: Improving security is useful not only for your insurance rates but also for avoiding theft threats. Video surveillance, alarms, code access entry, burger alarms, and tamper-proof locks are all items worth considering.
Appearance: Unbelievably, the look of a location can influence your rates. Much of this is merely human nature as humans are the ones who physically attend the property for an in-person insurance assessment. Items to avoid include peeling paint, damaged or deteriorating siding, poor roof conditions/leaking, visible and/or unorganized trash, poor parking lot conditions (such as potholes), lack of handrails, mold eradication, and other items.
Property Upgrades: Staying on top of both property upgrades and maintenance will help keep your insurance rates lower. Key items include heating, ventilation, air conditioning, roof, electric, plumbing, and façade.
Create a Building Profile: Just like a driver and a vehicle affecting their insurance rates based on their claims history and attributes (driver age, vehicle age, vehicle attributes, etc.), the same general idea applies to buildings and tenants. Building a profile for your location and occupancy will allow the insurance company to have the most relevant data. You want to do what you can to make it easy for the insurance company to avoid any internal mistakes or oversights, resulting in higher insurance rates.
In addition to the items above, make sure you work with the right commercial insurance representative. The appropriate representative and company will provide you good options for products and providers and give you specific building and policy recommendations. The top representatives will genuinely make a difference in your long-term costs and will significantly impact your bottom long in the long run.