Inospace, SA’s largest owner and operator of last-mile logistics parks, says tenants facing economic pressures are downsizing to smaller logistics spaces to remain operational.
The August survey of nearly 2,000 of its tenants across its 52 parks in Cape Town and Johannesburg shows that small and medium enterprise (SME) tenants are seeking small spaces of 50m²-100m². In some cases they are prepared to pay more for the limited space.
Previously, many of these tenants occupied logistics facilities measuring 1,000m² and more. Many require short-term additional logistics space on a month-to-month lease, or fulfilment and shared warehousing facility, which the company launched recently.
Fulfilment logistics provides services that include taking delivery and storage of inventory, processing orders and shipping returns on behalf of customers for a fee.
According to the August survey, tenants indicated that their businesses are under pressure due to low economic growth, rising inflation and interest rates, more power cuts and unreliable municipal services.
The 2021/22 surveys revealed healthy occupancy levels maintained above 92%, with Cape Town at almost 98% due to limited supply.
“Our portfolio is nearly 100% occupied for facilities smaller than 250m², resulting in lengthy waiting lists,” CEO Rael Levitt told Business Day.
He said on average, their call centre receives up to 50 calls a day for existing and new tenants looking for smaller spaces.
Inospace is an unlisted property company the business model of which is to buy old industrial buildings and turn them into conventional spaces and flexible workspaces that cater for small and medium enterprises, with flexible lease options.
The company, founded in 2017 with one asset valued at R30m, has grown its portfolio to R3bn,and plans to expand it to R5bn by 2025.
Sweet spot
Levitt said that 55% of the company’s tenants are small businesses with fewer than 10 employees, with popular smaller spaces ranging from 150m² to 300m².
“About 15% of our tenants have leased more than one unit and want bigger spaces as their companies grow. This has been our sweet spot, with high rental rates and no direct local competition,” said Levitt.
Though their tenants are struggling their bad debt and write-offs have not grown. It could be partially due to the business’ model of shorter than usual leases, its consultative approach to defaulting tenants and the sector, which experiences high demand.
Levitt said the company offers many flexible tenant options, month-to-month leases and fixed leases of up to five years. With limited availability, some tenants shy away from month-to-month leases as they want their space guaranteed, hence they would rather opt for smaller spaces, and take up additional space when needed.
“Our strategy is to work with struggling tenants rather than litigate with them. We would rather get [them] to take smaller spaces than default,” he said.
Levitt believes last-mile logistics is commercial real estate’s growth engine driven by growth in e-commerce and customer demand for faster delivery times.
With many small tenants on short leases, Inospace experiences much churn. The business also attracts new tenants, mostly e-commerce and online retail or logistics-focused businesses.
Small spaces within the portfolio achieve 11%-12% in rental growth compared to 6% for large spaces, which recorded rental growth of 8% in 2022. “Demand for last-mile logistics is high, and with limited supply, we expect rentals to keep growing.”
Levitt said in 2020 the company developed a propriety leasing software, LisaProptech, which enables Inospace to extract critical data and speed up leasing.
Inospace leases logistics space much like a hotel rent rooms. The software offers tenants a range of services such as advertising to each other, access to financial records, book meeting rooms, rent additional space and request maintenance assistance for their units. Tenants also have access to short-term insurance from MiWay and business financing through Lulalend, a financial provider for SMEs.
“The expansion of our service offerings such as the recently launched fulfilment and shared warehousing logistics, and investing in technology to improve efficiencies remain key elements to our growth and sustainability,” he said.
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