Warehouses: Flashy? No. Lucrative? You bet.
April 9, 2020
At first glance, warehouses aren’t as exciting as some of the companies and products in which Spectrum Business Ventures has invested. They’re not as thrilling as Terran Orbital, which launches satellites into orbit, or as delicious as Tocaya Organica, which serves healthy, fast-casual Mexican cuisine at locations across Southern California. Yet, warehouses can prove to be lucrative investments that venture capitalists should seek out in 2020.
Online retailers like Amazon, which brought in $600 billion in sales in 2019, are quickly displacing shopping malls and big-box department stores as Americans’ favorite venues for consumption. This new trend has given way to a seismic shift in the commercial real estate landscape. Once regarded as low-risk, low-reward investments, warehouse space has become a valuable commodity. According to a recent report by CNBC, demand for warehouse space – driven largely by online retailers – has outstripped supply by nearly 170 million square feet. This disconnect between supply and demand creates a lucrative opportunity for aspiring investors.
Here are five reasons that SBV sought to aggressively invest in warehouse space.
1. Online retail is growing fast
The online retail market isn’t just a fluke. According to a report by Smart Insights, the industry is forecasted to expand by 19% in 2020, an astronomical rate of growth.
This didn’t come as a surprise to the Spectrum Business Ventures team.
Spectrum Business Ventures predicates much of its investment strategy on observing the preferences of young consumers. Millennials and Gen Z they like convenience, and as they begin to encompass a wider swath of the economy, SBV intuited that convenience-based online shopping would continue to grow.
These online retailers need somewhere to store their inventory – and that somewhere is warehouses. As online shopping grows, so will demand for new warehouse space.
2. Online retailers need warehouses for ambitious same-day shipping programs
Online shopping has brought about an interesting paradox: as retailers like Amazon take unprecedented steps to offer consumers faster delivery, consumers respond by simply demanding more convenience. In a bid to satisfy this desire, Amazon has begun to expand its same-day shipping offerings.
As next-day, and increasingly even same-day, shipping gradually becomes the norm, Amazon and other online retailers and fulfillers will be under immense pressure to live up to their end of this ambitious bargain. Warehouses are the keystone of this shift in business to consumer delivery.
3. The warehouse supply shock
The rules of supply and demand are simple – when there is a limited supply of a product that is in demand, the value of that product goes up. This is very much the case with warehouses.
As CNBC reported, retailers are demanding 170 million more square feet of warehouse space than what can currently be supplied. Online sellers need this space to continue to drive their precipitous growth, and they’ll be willing to pay for it. Aspiring investors should take advantage of this disconnect between supply and demand and of the high value per square-foot that it will create.
There is some urgency, though. Supply will eventually catch up; and now is the time to get into the market.
4. Warehouse space can be innovative
Warehouse space may not seem as flashy as tech or entertainment, but the industry is still ripe for innovation.
One way that investors can innovate is by looking for warehouse space in the immediate vicinity of major airports and transit hubs. A location where companies can easily store goods without having to incur hefty shipping costs is ideal for major online retailers.
5. Invest in the markets of the future
At Spectrum Business Ventures we strive to see the world differently, and we always look for opportunities in the markets that will define the future of consumption. Ideas, products, and firms that may seem outlandish in 2020 could be economic mainstays by 2030.
It is important that investors look for cutting-edge new markets and technologies, but that they also look for the peripheral opportunities that result from these new markets. Warehouse space is one of these peripheral markets – it’s a way that investors can get into the online shopping market without having to compete directly with Amazon.