An Analysis of the Factors Affecting Warehouse Rents

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1 , pp An Analysis of the Factors Affecting Warehouse Rents Saejoon Oh, Jongchil Shin, Department of Real Estate Studies, Konkuk University 10 Neungdongro, Gwangjingu, Seoul, 0509, Korea Corresponding author: Abstract. Logistics market in Korea has been contiously expanding due to the development of ecommerce. Though industrial investment to warehouses has been getting more attention in the form of REITs or Real Estate Fund, still is related academic research at its early stage. This study attempted to investigate the determining factors of warehouse rent in Korea, providing guidelines for investment decision making with not only manufacturing companies but indirect investment agents, e.g. REITs and Real Estate Fund. The results showed that warehouse rent was significantly related to the variables, such as distance(accessibility of) to expressways(), accessibility of nearby cities(), width of adjacent street(+), lot size(), story height(+), building age(), cold and frozen storage facilities(+), and conglomerate tenants(). Keywords: Industrial Property, Warehouse, Rents, Hedonic Price 1 Introduction Domestic logistics and warehouse market has been steadily extended alongside fast growing large scale stores, e.g., department stores, outlet stores, or hypermarkets. The growth of large scale discount stores, especially nonstore retailing business, for example, internet shopping malls, brought out the increase of trade volume and outburst of courier service business, which triggered logistics warehouse business activation and expansion. In addition, warehouse investment from REITs and Real Estate Fund is getting more attention among investors, and their investment ratio has been increased. Though logistics warehouse market has gained interest, not yet does it in the academic field in Korea. This study hence could be considered as a starting point of the related study regarding price or rent determining factors, by implementing empirical analysis. It could provide guidelines to help making investment decisions with not only practitioners in manufacturing companies but alternative investment agents of REITs and Real Estate Fund. ISSN: ASTL Copyright 016 SERSC

2 Warehouse Market Trend in Korea With the development of expressway networks, warehouses began to be located at the outskirts of metropolitan cities. Large scale warehouses are mostly owned by the practical users. Recently, they tend to be constructed for leasing business. Nowadays, warehouses are equipped with various types of storage system for multipurpose use (Ha, K.C., 015). In November 01, the number of nationwide warehouses accredited by Shipping and Logistics Law reached,0, and total lot sizes were approximately 0 million m. As for the location, they are mostly located in Kyunggi/Incheon area(3%) and Busan/Kyungnam area(35%), which explained about 70% of the total area. Specifically, Yongin(nearby junction between Kyungbu Highway and Youngdong Highway), the southern outskirts of Seoul, is the main location where major distribution centers for warehouses are located. As they are in superb location along with great demand, their supply is accelerated. 3 Empirical Analysis 3.1 Data and Methodology The characteristics influencing warehouse rents were classified as follows: area/community, location, building, and macro environment. To analyze the factors affecting warehouse rents, multiple regression analysis was implemented by using Hedonic Price Model. The dependent variable (Yi) of the Model was defined as converted rent per floor area, and the independent variables as area characteristic (A), location characteristic (L), building characteristic (B), and macro environmental characteristic (M). Y i = f (A, L, B, M) (1) Empirical data were collected from Korean branches of global real estate service companies, such as JLL, CBRE, and Cushman & Wakefield, and accumulated and constructed for the Model. Among secured samples, after eliminating the missing and outlier values caused by their different styles of data management, 138 actual transaction rent data were selected as final samples. The regional ranges were mostly within Kyunggi province, though other areas were included as well. The dependent variable was the converted rent price of available warehouse and independent variables were classified as characteristics of area, location, building and macro environment. 13 Copyright 016 SERSC

3 3. Results The goodness of fit test is represented by R² = 0.778, adjusted R² = 0.73, showing reliability. F value is.390, and variance inflation factor is lower than 10 in all variables that no multicollinearity is shown. By using multiple regression model, the results showed that location characteristics were significantly affected by the distance; the far the distance to inter change of expressways and to nearby metropolitan cities, the lower the rent (); on the other hand, the distance to nearby ports wasn t. It can be assumed that since expressway networks are highly developed, they don t need to be located near port. The wider the street for accessibility of the building, the higher the rent. If warehouse lot sizes are bigger, unit rent price goes lower. The reason why the lot size and the rent go to the other directions could be explained; large scale warehouses are mostly equipped with all types of storage, from cold and frozen to room temperature; they even have enough stories that the rent could be adjusted for various types of storage. As warehouses aged, the rent went downward. Floor height and Number of parking per lot size were positively related to the rent (+), while conglomerate (large corporate) tenants were negatively related (). Kim, C.S. et al. (007) argued large corporate tenants generally tend to stay longer once they rent warehouses due to costly moving and risk elements. Therefore, they tend to stay at the same place longer than others and highly influence the local economy. Large corporate tenants kept their supplies relatively longer, asking for price cuts and lower rent than average tenants, getting advantage in negotiation. Copyright 016 SERSC 135

4 Table 1. Regression Estimation Results Characte ristics Area Location Building Variables Unstandardized Coefficient B (Constant) Southern part of Kyunggi Province Eastern part of Kyunggi Province Accessibility of expressways Accessibility of ports Accessibility of cities Width of street Standar d error Standardiz ed Coefficien t Beta Floor area Lot size Number of parking per lot size Floor height Building Age Cold and Frozen facilities Large corporate tenant t t Collinearity Statistics Allowan ce VIF Macro Environ 136 GRDP Copyright SERSC 9 ment Employment to population ratio Dependent variable = Converted rent/m N=138 Fvalue=19.35 R²=0.761 adjusted R²=0.7 P<0.05(), P<0.01()

5 Conclusions This study attempted to investigate determining factors of warehouses rent by using 138 actual transaction rent price data practiced in Kyunggi province, where logistics warehouses were congested in Korea. The empirical results showed that variables significantly influencing rent were as follows: accessibility of expressways (), accessibility of cities (), width of street for accessibility (+), lot size(), floor height(+), building age(), cold and frozen facilities(+), and conglomerate corporate tenant (). As the other types of industrial property showed in their common hypothesis, it was verified that industrial property were affected by intraregional transportation accessibility. However, the macro environmental variable was not significantly affecting the rent, which could be inferred that due to limitation on data collection of warehouses only regional figures at the time of the trade were reflected in multiple regression analysis. Given the absence of advanced academic literature, this study could trigger more interest not only from the academic field but from the logistics market. Therefore, it could serve as a basis for further academic research regarding determining factors of warehouse rent and sales price. In addition, it is distinctive in that this study empirically analyzed the data of actual transaction rent, not of asking price in the market. However, there is also a limitation. Since not much of domestic research regarding industrial property has been done, precise data sample acquisition was restricted to certain areas. In addition, due to limitation on cross sectional data, the time period couldn t be long enough that various macro environmental variables were not reflected either. References 1. Ambrose, B.W.: An Analysis of the Factors Affecting Light Industrial Property Valuation, Journal of Real Estate Research, 5(3), pp (1990).. Kim, T.S, You, Y.S., Kang, K.S: A Study on the Demand Research for Facilities of Logistics, Korea Safety Management and Science, Spring Conference, pp.61~71 (007) 3. Lee, J.H, Roh, O.S.: An Empirical Study on Location Factor of Distribution Center in Kyeongkido, Journal of the Korean Society of Supply Chain Management, (), pp.13 3 (00). Yang, K.M.: An Empirical Study on Location Factor of Distribution Center in Kyeongkido, Korea Safety Management and Science, 13(), pp.19~135 (011) 5. Lee, W.D, Sun, I.S.: Analysis of Location Characteristics of Cold and Frozen Storage 6. Warehouse through Logit Models, Korea Logistics Review, (5), pp.190~09 (01) 7. Lee, K.S.: 01/015 Seminar of Logistics Market Overview, SCM and Logistics (015) Copyright 016 SERSC 137

6 8. Kim, S.W.: 01 Logistics Market Review and 015 Market Overview, Postal Management Institution (01) 9. JLL Korea : Korea Logistic Market Overview, 1Q (015) 10. Ha, K.C.: Real Estate Development, Copyright 016 SERSC