Warehouse Industry Losing 30% of Capacity to Under Utilization. Short-Term Lease Platform Puts it to Work
by Dave McKenna, Editor CREB on June 16, 2020
Imagine your granddad stuffed 30% of his annual income into the furnace every year because he just could not find a better place to keep all his money. You would probably have some advice for him. And imagine this annual cash-bonfire amounted to over $40 billion a year – you would really, really have something to say about that. Well, if your grandfather were the warehouse real estate market, that is exactly what you would find.
It is estimated that 5 billion square feet of warehouse space is vacant or under-utilized at any given time, which is about 30% of the of 16 billion square feet of warehouse capacity in the U.S. Given an average rental rate of $8 per square foot per year, that’s a staggering $40 billion of waste going into the furnace of futility every year.
Chunker is a short-term leasing platform for warehouse real estate that helps old granddad hold onto more of his $40 billion. “There’s a ton of demand for short term use of space, and there is plenty of space available,” said Brad Wright, co-founder and CEO of Chunker. “Chunker is like the Airbnb of warehousing. We’re bringing the sharing economy to an industry that has never had access to this kind of technology before.”
Warehouse space is perhaps the most conservative and techno-backward segment of the notoriously conservative and backward commercial real estate market. The assets are comparatively simple, sprawling, often in peripheral areas, and governed by exceptionally long leases — up to 20 years. And it is profitable! Not very conducive environment for innovation.
And then… there was a pandemic. “The supply chain itself had been remarkably resilient, but the flows have changed,” Wright said. “a lot of space that is usually full is now vacant, and some space that was vacant is now at capacity. The pandemic has forced people to think differently, and that has been a great boon for Chunker. We’ve already done more business so far this year than we did in all of 2019.”
The big footprints and long leases force the owners and operators to make very long bets, “but their crystal balls aren’t that good, said Wright. “The warehouse occupiers’ businesses are disrupted all the time,” said Wright. Their operations are subject to many unknows — like supply chain issues, lost or gained customers, and demand for temporary accommodation by customers with special projects. According to Wright, there is a lot of volatility in demand for space, but the supply is locked up in complicated long-term leases. This big disconnect leads to a lot of vacant space — at all times. This big disconnect is also a big opportunity as Wright sees it.
“In the past someone with a temporary space need or a sudden vacancy on their floor couldn’t get a broker to call them back. It just wasn’t worth the broker’s time to facilitate a short-term lease,” said Wright. “It takes just as much time to close a three-month deal as a ten-year lease, but for virtually no money. The broker, who sits in the middle between supply and demand has never had the tools or the incentive to make deals for short-term space. Chunker provides a marketplace and a low-friction transaction for all parties involved.
Chunker’s co-founder James Merrill spent twenty years as a commercial real estate broker doing nothing but buying, selling, and leasing warehouse space. “James is very in tune with the warehouse broker world, its operation, challenges and incentives,” said Wright.
Wright and Merrill have created a platform in Chunker that allows space owners and operators to list under-utilized space for short-term use. Users of the system can search geographic areas in which they have needs and identify positional space. Users are can also secure the space immediately on-platform in as little as fifteen minutes. “We’ve had people search, lease online, and move-in the same day,” said Wright.
You can’t afford to spend three months negotiation a three-month lease. We’ve had customers search, sign, and move-in the same day with Chunker-Brad Wright, Chunker CEO
The typical Chunker lease is three to six months, as opposed to the typical 10 to 20-year lease. Chunker accomplishes the amazing velocity by simplifying the agreement itself. “There’s a lot of legal drama that comes with most warehouse leases. But you can’t afford to spend three months negotiating a three-month lease,” said Wright. Chunker solves this problem with a unique “space utilization license” which drastically stream-lines and accelerates the deal, and enables it to be fully executed end-to-end on the Chunker system.
The Chunker solution is also innovative in its business model. Chunker makes its money on the lease by charging a service fee. It is free to list on Chunker and free to search. Chunker also offers a commission to a broker if one is used. The commission is paid from the service fee charged on the transaction. This provides the broker with a quick solution to help customers with their short-term needs, and an incentive to participate the transaction.
There may be broader changes on the horizon for warehouse as well. The evolution of retail and e-commerce has not only created more demand for distribution space, but it has left significant retail space vacant. Rick Kalvoda, Senior EVP at Altus Group, a leading provider of independent advisory services to commercial real estate globally, is seeing not only an increasing demand for temporary space, but also a trend of re-purposing vacant retail space to industry and warehouse. “Pandemic has accelerated the trend in last mile logistics and created a land-run on warehouse capacity.” Said Kalvoda. “More operations are looking at re-purposing former retail space for last mile logistics,” Kalvoda said.
A 2019 CBRE study examined 24 vacant retail properties totaling 10.9 million square feet that was converted to industrial/logistics. It found that as major retailers are adapting to the new world of e-commerce, by either reorganizing as multichannel platforms or by bankruptcy, they are disposing of under performing real estate assets. These properties are often purchased by investors who re-purpose them for logistics and light industrial.
This may be the tip of the retail iceberg as it melts into the hot ocean of the 21st century global economy. “We’ve just signed a deal with an investor who bought 40 vacant Sears stores out of bankruptcy,” said Wright. “They all have four walls, a roof, and loading dock and total about 6 million square feet. We will carve up that space and rent it incrementally until the sites are eventually redeveloped for other purposes.”
As for the future of warehouse real estate, Wright see’s competitive pressure forcing the industry to be more flexible and integrated over time. The temporary Covid pandemic is likely to lead to long lasting in the business of warehouse space as it finds ways to be more flexible, more efficient, and ultimately more profitable.
Is it possible that the warehouse-of-the future could look a little more like WeWork — with purpose-built warehouse space specifically designed to serve short-term lease arrangements a-la co-working? Wright borrows a line from another big name in warehouses, Mike Zimmer, founder of The Men’s Warehouse –“I Guarantee It!”