The growth of the e-commerce industry has been fuelling higher demand for warehouses. Yet, warehouse supply continues to be lower than warehouse demand even as warehouse construction costs, financing difficulties, and other challenges continue to deter CRE investors. 

Yet, demand exceeding supply provides an immense ROI opportunity for CRE investors who can navigate the difficulties of building warehouses. In this article, we identify these challenges and how to overcome them.  

Initial hurdles

Permits, zoning, and construction regulations are the first hurdles to climb.  

The best way to traverse this is to be sure that the land or property you intend to purchase can be legally used to build a warehouse based on current zoning regulations. You can do this by speaking to the relevant local authorities. 

In some instances, you might need to get special permits or variances before you can build a warehouse in a certain location. Knowing this ahead of time and having assurances from the authorities that getting them won’t be an issue can make your life easier.  

Estimating construction costs

Before you know how much funds you should seek, you must be reasonably sure of the construction costs

However, construction costs will vary widely based on the size of the warehouse (small, medium, large), the services that will be provided (low-end or high-end), and the warehouse location. Material type (metal or concrete), the sophistication of the HVAC system, and the number of professional types are among other relevant factors. 

You can approach this challenge in three ways. First, you can use a down-top approach by listing every relevant item and estimating their costs based on current market conditions. Second, you can use a top-down approach by checking the cost of recent comparable projects. Third, you can employ a quantity surveyor to handle the estimation.  

Whatever method you choose, ensure you come up with an accurate figure as this will be crucial when it comes to funding

Also, remember that it is better to overestimate than to underestimate. 

Securing necessary finance

Though we have had two interest rate cuts in 2024, it is not yet sufficient to massively increase the liquidity in the CRE market. 

It is no longer news that getting financing from traditional banks has become difficult due to tighter regulations, among other factors

To solve this problem, you need to focus on non-traditional or alternative financing sources like equity financing (joint ventures, private equity, crowdfunding, partnerships, etc) and debt financing (hard money, private money, seller financing, and bridge loans). 

Similarly, you will need an earnest money deposit financing company to get the earnest money deposits needed to purchase the land or property you want to turn into a warehouse.  

Carrying out the actual construction

Depending on the size and complexity of the warehouse, finding the requisite labor can be hard. 

Also, handling the logistics can be time-consuming. 

Though you can solve this by outsourcing the work to a construction firm, you still need to be actively involved in supervision.

Planned and unplanned visits, frequent reports, and constant communication with all and sundry can help you get on top of the project and ensure that it is not deviating from the specifications. 

Building warehouses can be challenging but for those who can navigate those challenges, there is a gold mine waiting to be unearthed. 

Do the necessary due diligence, sign up with a company like Duckfund to get the needed earnest money deposit financing, estimate the construction costs accurately, secure the needed funds through equity or debt financing, and supervise the actual construction to ensure everything turns out as you envisaged.