Due to a boom in eCommerce and shifts in the economy, a new trend in industrial real-estate has emerged.
CoWarehousing – ie. like Coworking but for warehouses – has emerged in North America as a way to create a community/new economic model for those businesses in need of warehouse space. The question is, what is driving this Business Model Trend and is it sustainable?
- Post-pandemic shifts in consumer behaviour created an eCommerce boom and consequential shift in retail/wholesale markets
- Industrial real-estate market has become tighter and spaces in prominent jurisdictions are now selling at a premium
- Typical cost structure for industrial warehouse space – base rent + monthly operating costs + overhead – is instead blended into one monthly membership fee
- Like the other Co-s (CoWorking, CoLiving), the strength of the community plays a role in the mid and long-term success of the business model
- Looking at Future Trends, we can see that accelerating the growth of existing members will likely play an important role in scaling the model, likely more than acquiring new members
The lesson from Coworking is that leverage can kill this business model before it has a chance to blossom.
CoWarehousing Business Model: Bullet Points
Cowarehousing Value Proposition Canvas
- Value Proposition is flexibility and community for industrial warehouse space
- Generate Revenue by selling monthly memberships – flexibility allows short-term contracts
- Additional services relative to cowarehouse members’ needs – ie. logistics coordination, accounting, business development, etc. – create additional Revenue Streams
- Customer Segments include new eCommerce businesses, Trades Operators, Mid-Sized Firms scaling into new markets, etc.
- Cost Structure is driven by lease/mortgage of the main warehouse, plus the operational costs to run the warehouse. Depending on the structure of the cowarehouse, there may be a staff in charge of running it or it may function more like a co-operative
- Partnerships can be formed with commercial real-estate entities, REITs (Real-Estate Investment Trusts) or by similar sized firms who co-sign a lease together
Cowarehousing Business Model Canvas (Mockup)
Example Cowarehousing Firms:
- TradeSpace (Canada) – “flexible cowarehousing and office space”
- SaltBox (U.S.) – “powering your logistics from start to scale”
Reference Business Model: Coworking
Pretty much everyone has heard of Coworking at this point. There is nothing necessarily new or novel about the concept.
Some smaller operators managed to turn Coworking into a profitable model in the early days, but the spectacular downfall of WeWork cast a shadow over the sector that is unlikely to dissipate anytime soon, especially with interest rates rising.
In the early days, Coworking was all about creating community. The business model was based on membership, with a typical split between ‘Hot Desks’ for more nomadic workers, and ‘Dedicated Offices’ for small companies. Bundled services created additional layers of value for certain firms, but the novelty in early days was the connections that could be created.
Lessons From WeWork
WeWork tried to be clever and scale this into multiple different geographies, arguing around the time of its failed IPO that it was a “tech company.” The problem is that the business model is built on top of real-estate, and many big coworking/coliving operators levered up to buy real-estate at ultra-low rates in the early/mid part of the last decade.
Trying to predict the direction of both real-estate markets and interest rates is a dangerous game. Commerical real-estate assets have come under enormous pressure due to the new ‘work-from-home’ trend. Industrial real-estate is hot right now, but will it stay that way?
Who knows, but the lesson from Coworking is that leverage can kill this business model before it has a chance to blossom. Scale is more likely to come from the growth of the membership itself, rather than simply adding more and more members across multiple geographies.
Future Trend: Accelerator
Fast-forwarding into the future, what can we expect in cowarehousing?
Right now, as with coworking, a lot of the activity is happening in and around cities. The challenge will be adapting to the cost of leasing/buying industrial real-estate space in such a hot market with rising interest rates.
But unlike coworking, the average cowarehousing tenant has a much different profile. One tenant can take up a large % of the space, and scale up or out of that space. Another tenant can operate in one location and be looking to expand into a new market in another. Because we are talking about logistics and transportation, there doesn’t necessarily have to be the population density to achieve success.
Where cowarehousing operators see an opportunity the broader industrial market may overlook: small towns as well as buildings that don’t have the most up-to-date features. “We don’t need to have a population density like a large coworking (office) needs to,” Freeman said. “We can go into some of the smaller towns … those can be extremely viable for us.”
BizJournals
Aligning The Incentives of Tenants and Landlords
Ultimately, cowarehousing operators are leveraged to the success of their tenants. We have seen how community being embedded in the business model is at the heart of the success in virtually any business model that starts with “co-“.
In the future, the goals of cowarehousing operators will likely consist less of purchasing space and more of working to help their tenants grow. Not that cowarehousing operators will take stakes in their tenants – as would be seen in an accelerator – but the incentives are aligned for each to either fail or rise in the mid-term. If a cowarehousing operator is forced to constantly churn through tenants, then they will have to focus a lot of energy on customer acquisition. The business model is also exposed to a lot more vacancy risk.
For cowarehousing to scale-up in a sustainable way means that all parties need to be make money – the real-estate firm(s) who fund the acquisition or partner with cowarehousing operators, the cowarehousing firms themselves, and the tenants. If one party is left holding the bag, the whole model will collapse.
At this point, the cost-benefit for small tenants who are being squeezed out of the mainstream industrial real-estate market is excellent; but everyone is betting that the trend scales-up and more small firms jump on the bandwagon, much like coworking. The difference is that coworking is mostly dominated by small operators who have small teams, zero inventory, and work at their desk.
Cowarehousing is all about space to manage inventory, logistics, and staff growth. Scale can be built on existing members as much as new ones in cowarehousing, whereas the same cannot be said for coworking.