A good warehouse is hard to find in Northwest Arkansas

Editor’s note: This is the first of two stories about the warehousing sector in Northwest Arkansas.
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Lance Stokes, chief operating officer for Lauren James Co., will never forget the day, about a year ago, when he had his entire inventory of dresses and t-shirts loaded on seven semis, headed from Kansas City, Mo. to Northwest Arkansas, and had no place to put it.

He and his wife, Lauren Stokes, launched their Fayetteville-based clothing business online in February 2014 and business had exploded, doing more than $35,000 the first day. As sales and products increased the company quickly outgrew its warehouse space of 5,000 square feet in Springdale. It was then Stokes decided to outsource their warehouse operation to a third party in Kansas City. That didn’t last long.

“When the people we paid to ship our stuff didn’t do it to our standards, I lost my mind and basically, without a plan, got seven trucks – full semis – and in three days I moved everything out,” Stokes said.

The problem was he had no place to warehouse the product in NWA, and warehouse space was almost impossible to find.

Stokes’ salvation came through a random connection at the Fayetteville Chamber of Commerce who told him that Bright Technology on Armstrong Ave., had unfinished warehouse space they might let him use.

“It was clearly unfinished, dirt everywhere,” Stokes said. “But I said, ‘I need it. Can we get it cleaned up and ready? I’ve got trucks on the road.’”

And so he moved his entire inventory and employees into the warehouse still under construction. Quickly, 60,000 square feet of the total 80,000 square feet available was completed for Stokes’ company’s needs.

Stokes’ struggle to find adequate warehouse space is quite common across all businesses sectors in NWA. As the population grows and the economy heats up, all kinds of businesses – start-ups, regional manufacturers, standard logistic companies, dry goods and refrigerated food companies, and service providers – struggle to find available space that will fit their needs.

Warehouse space in Benton and Washington counties totals 28 million square feet, according to a second quarter 2016 market research report done by Xceligent, a commercial real estate research information and marketing firm based in Kansas City, Mo. However, according to the same report, half of that is considered light industrial space and so only about 14 million square feet in NWA is true warehouse space. Of that space, the vacancy rate is only about 5% and dipped as low as 4% last year.

TIGHT LOCAL SUPPLY, NATIONWIDE TRENDS
“It is very difficult when seeking space for occupiers of (warehouses) to go out and quickly identify space. And that really ranges from whether you’re needing 10,000 square feet of space up to these larger users seeking 100,000 square feet and above. It’s a challenge with the current landscape of the market just to find available warehouse space,” said David Erstine, vice president of CBRE Group, a national commercial real estate brokerage firm based in Fayetteville.

The shortage is a result of Northwest Arkansas’ growth pushing demand for modern  warehouses well ahead of supply. The warehouses in existence tend to be functionally obsolete for what companies need.

“A lot the warehouse space that we do have across the region right now is not ideal, it doesn’t have high ceilings or the kinds of loading docks or the kinds of layouts that modern supply chain management would need,” said Kathy Deck, director of the Center for Business and Economic Research at Sam M. Walton College of Business at the University of Arkansas.

“They need higher ceilings, a type of sprinkler, a type of lighting, a type of construction. … All of that factors in, so you might have some vacancy here and there in the market, but a lot of it might have lower ceiling heights and loading that’s tougher to get in and out of,” said Marshall Saviers, president of Sage Partners. “So, if there is any vacancy here, usually it’s not very functional. That, combined with high growth in the area, creates a real strain on the market.”

Jason Bailey, vice president of finance for Arkansas Refrigerated Services, said although his company was able to find warehouse space for their dry goods distribution business in Northwest Arkansas, the space had to be re-done for their needs.

“We’re finding lots of older buildings out there that can be retrofitted or that can be made to serve a need. But, your high ceilings, wide aisles warehouse space has been tough to find,” Bailey said.

The problem of lack of warehouse space is not confined to Northwest Arkansas, according to CBRE’s second quarter 2016 Marketview Snapshot. A total of 41.6 million square feet of new supply was added nationwide in the second quarter, but for the 24th consecutive quarter, it fell short of demand. The availability rate nationwide was 8.7%, the lowest it has been since 2001. The Snapshot also reported a 1.8%  growth in average net asking rent for the second quarter to $6.36 per square foot, registering a year-over-year growth of 4.6%.

E-commerce is fueling the demand nationwide, according to a May 16, Wall Street Journal article which quotes David Egan, CBRE’s head of industrial and logistics research in the Americas. Speed of service and delivery are crucial to the success of e-commerce and so they are demanding warehouses close to population centers, he said.

LOST OPPORTUNITY
Experts say a region not able to keep up with the need for warehousing, could potentially see lost growth opportunity as companies may choose to locate elsewhere.

“They circle the market and quickly identify that we’re underbuilt in some of these categories and we just don’t have the available space to meet their needs and so they have to go elsewhere,” Erstine, with CBRE, said. “Elsewhere being another region or another MSA and they don’t land in NWA.”

Michael Harvey, chief operating officer of the Northwest Arkansas Council, said a lack of warehouse space is also a hindrance to growth for businesses already here. Along those lines, Bailey with Arkansas Refrigerated said the lack of usable warehouse space has made doing business here more difficult.

“I don’t think we’ve necessarily missed business, but we’ve had to work a lot harder at getting the business we do have because of the shortage,” he said. “We’ve been pretty creative with the space, retrofitting, etc.”

In trying to help address the shortage, Harvey is bringing developers and city leaders together to discuss a partnership to put more speculative warehouse buildings on city-owned properties that are hard to market.

“I put together a group of guys and we’re talking about it. I’ve made them aware of the issue,” Harvey said. “You may have a (city-owned) site that’s getting isolated, a 10 to 15 acre site, and it might be better served if you put a spec building on it. It might be more marketable.”

Harvey believes the partnerships will result in more warehouse space in the coming months.

“If it’s a 12-step process, we’re definitely out of step one. We’re not in denial here that we got a problem. We’re actively working on it,” he said. “Hopefully bright and sunny days are ahead in terms of us being able to get some more of this product online and help alleviate this issue.”

As for Stokes, his company will soon move into the remaining 20,000 square feet of warehouse space in their current location, bringing them up to 80,000 square feet. He thinks that will be enough for the next several years. After that, he’s not sure, but said he has learned a valuable lesson and will always do whatever it takes to keep his product warehoused in Northwest Arkansas.

“A mentor of mine, with a million dollar apparel company in NC, told me ‘never lose sight of your product,’ and I’ve taken that to heart,” Stokes said. “That means, we’re going to do every bit of the process. We’re going to warehouse, we’re going to distribute, we’re going to do light manufacturing. We’re going to see the product. We’re the only ones that really care about it. That’s the way it should be… So, (warehousing here) is very important.”