INDUSTRIAL ROARS AHEAD – Efficient distribution networks mirror explosive growth in e-commerce.

 

“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “ . ARE YOU READY TO SELL OR PURCHASE YOUR LAND OR COMMERCIAL BUILDING IN PHOENIX, SCOTTSDALE, MARICOPA COUNTY AND PINAL COUNTY, ARIZONA,  CLICK HERE  AND PLEASE CALL ME.     520-975-5207 or email me walterunger@ccim.net.  ….  VIEW ALL OF WALTERS LISTINGSLet me know if you are interested in Apartments: CLICK HERE FOR APARTMENTS FOR SALE     

Beth Mattson-Teig,  Beth Mattson-Teig is a business writer based in Minneapolis.

It is no surprise that the demand for industrial space in warehouse, distribution, and fulfillment centers has been soaring along with the explosive growth occurring in e-commerce.

Online sales in the U.S. are expected to reach $523 billion in 2020 – up 56 percent from the $335 billion in 2015, according to a report by Forrester Research Inc. Amid that backdrop, e-commerce users also are proving to have a big impact offline in the industrial real estate market. They have been gobbling up huge blocks of space, fueling new construction, and attracting more institutional and global investors to the market.

E-commerce launched a new generation of mega-sized facilities that can store and process goods more efficiently. As the industry continues to evolve, space demands are shifting once again as firms zero in on “the last mile” – the final leg of the journey in delivering product purchases. E-commerce companies are moving closer to customers to speed delivery.

“We are such a time-sensitive society where people want the stuff they order yesterday,” says William G. Leffew, CCIM, a senior vice president at Bellweather Enterprise in Louisville, Ky.

Shipping hubs such as Louisville, Memphis, Tenn., and San Bernardino, Calif., have benefitted significantly from that rapid-fire distribution of goods. For example, Louisville is an international hub for UPS, and its airport is one of the busiest in the world for freight tonnage. Louisville also has landed dozens of retail and e-commerce companies, including major firms such as Best Buy, Camping World, Guess, and L’Oréal to name a few.

However, Amazon is the clear leader of the pack in the e-commerce world. Not only is Amazon continuing to expand its distribution and fulfillment footprint with super-sized facilities in the U.S. and Canada, but the company has been the player to watch for how it is structuring its distribution network, and where it is locating facilities.

Amazon recently planted a flag in the Milwaukee metro with two fulfillment centers totaling about 1.5 million sf that opened in early 2015. “That really put us on the national map,” says Jeff Hoffman, CCIM, SIOR, a principal at Cushman & Wakefield | Boerke in Milwaukee.

Those facilities were located about 30 miles south of Milwaukee in Kenosha County, which is about two-thirds of the way between Milwaukee and Chicago. In early 2016, Amazon also leased 50,000 sf in an in-fill Milwaukee location to serve as an urban fulfillment center for its Amazon Prime delivery.

“A lot of developers and brokers scratched their head at the location. However, when you look at the key for e-commerce users – access to rooftops – it made a lot of sense for why they sited there,” Hoffman says.

Amazon dominates the conversation about e-commerce, but certainly there is a large and expanding e-commerce sector with online retailers such as Zappos (shoes) and Wayfair (furniture). Traditional retailers are being forced to compete in the online arena and are building out their own networks for distributing those goods to customers both nationally and internationally.

In addition, there is a broader ripple effect that is providing a lift to suppliers, 3PL companies, and packaging firms. In Milwaukee, for example, ULINE packaging has taken on over 3 msf of space in the Milwaukee metro in the past two years, including a new 1.2 msf distribution center that opened this spring.

Steady Demand for Space

Overall, the industrial market has been performing very well with slow and steady improvement over the past five years. The vacancy rate for warehouse/distribution space held firm at 10.6 percent in first quarter, according to Reis. “I think it is a pretty broad-based recovery, although there are certain metros that are doing better than others, such as San Bernardino, Nashville, Chicago, and Atlanta,” says Barbara Denham, an economist at Reis Inc.

It is difficult to say how much e-commerce contributes to the overall activity in the market, Denham notes. In addition, a lot of e-commerce firms are building or buying their own spaces, which does not affect absorption or rents in the multi-tenant market, she adds. Under Armour, for example, reportedly invested $100 million in a new 1 msf distribution facility that it opened in Nashville, Tenn., earlier this year.

Certainly, there are multiple industries driving demand for industrial space. In Vancouver, B.C., the industrial market relies on key industries such as manufacturing, oil and gas, and lumber, as well as distribution.

“There has been a huge increase in demand and absorption for 3PL space,” says Sebastian Espinosa, CCIM, associate vice president, industrial at Lee & Associates in Vancouver (formerly DTZ Vancouver). The demand for large distribution facilities is putting added pressure on a market where both available space and land are in short supply.

In the past year, Amazon expanded its operations in Vancouver with the lease of an additional 570,000 sf of warehouse space in New Westminster, B.C. Amazon now occupies close to 1 msf in metro Vancouver with about 763,000 sf of warehouse and 189,500 sf of office space, according to Espinosa. Vancouver is battling a supply crunch with a record low metro vacancy rate that is below 3 percent.

For example, companies looking for 20,000 sf of distribution space in Surrey, B.C., a large suburban in southeastern Vancouver, have five or six options compared to about 10 choices just a year ago. Those options dwindle even further as the space requirement gets larger, Espinosa notes.

Demand for e-commerce fulfillment and distribution centers also is pushing rents higher in many metros. Globally, rents for prime logistics space rose 2.8 percent last year, according to CBRE. In addition, six of the top 10 global logistics markets with the fastest growing rents for prime logistics space were in the U.S. Oakland, Calif., posted the highest prime logistics space rent gains in 2015 at 29.8 percent; followed by New Jersey at 15 percent; and the Inland Empire in California at 13.5 percent. Nationally, average effective rents for the broader office/warehouse market reached $4.48 psf in first quarter, which represents an annual growth rate of 2.1 percent, according to Reis.

The Last Mile

Distribution and fulfillment users have become very location sensitive, which has created strong leasing velocity in the marketplace as companies reassess location strategy. “Targeting the rooftops” for locations is a strategy more frequently seen in the retail sector, but that approach is increasingly influencing site selection decisions for industrial users. Companies want locations that allow them to reach customers faster and more cost-effectively.

“Anything that you can do to reduce logistics expenses is critical right now,” Hoffman says.

For e-commerce firms in particular, industrial space needs is less about the cost of the real estate and more about transportation costs, agrees Kevin McGowan, CCIM, SIOR, president of McGowan Corporate Real Estate Advisors in Allentown, Pa.

“Real estate brokers are supposed to get low rents for their customers,” he says. “However, the reality is that you can get a really low rent, and if that facility is in the wrong place the cost for the company to deliver the product would not be competitive.”

Amazon is still growing and adding new facilities. At the same time, their distribution network is evolving as the company tries to figure out what’s next, McGowan adds. The Amazon Prime model that promises next day or even same day delivery is driving decisions to locate closer into the population centers of major cities. What’s ahead for Amazon and other e-commerce firms is trying to figure out “predictive demand.”

In theory, firms can use consumer habits and past order history to develop customer profiles and crunch that with big data to know what inventory needs to be moved closer to consumers, McGowan says.

“They are all about same day delivery,” he says. So how do you configure the supply chain so that one, same day delivery actually happens. Two, it is cost-effective so that you can make money doing it.”

Another consideration that is moving to the forefront for e-commerce companies is their ability to attract labor. Distribution has traditionally always been done at the pallet level, such as shipping large blocks of goods direct to a retailer. E-commerce is more highly focused on the parcel level as companies ship single items or a “shopping cart” of select items to an individual customer. So, even with a tremendous amount of automation, fulfillment centers need to hire a lot of workers.

In some instances, companies are moving further out in the metro where the cost of living is more affordable for warehouse workers. In other cases, companies are opting for in-fill locations where there is more population density.

“What we’re finding is that your traditional tenant mix is not looking to go out to the next rural cornfield for development,” Hoffman says. “They want to be close to rooftops. They want to be close to customers, and they want to be close to their employees.”

Rising Spec Development

E-commerce and 3PL firms are continuing to demand larger footprints for bulk industrial facilities. Buildings that are 500,000-plus sf with clear heights between 32- and 36-feet are now the norm. Those changing demands are driving more build-to-suit and spec activity, because the inventory that matches those requirements simply doesn’t exist.

In addition, traditional warehouse and distribution facilities were not designed to be ergonomically and labor friendly. Now there are more workers in the buildings and companies are competing for labor. Some facilities are sited in a “warehouse farm” where there may be 15 facilities.

“There are competitors next door that would happily take your labor force,” McGowan says. So, the smart companies are starting to design facilities that are more appealing to workers with natural light and a more comfortable environment. State-of-the-art buildings such as those occupied by Amazon also rely more on automation and robotics, which means more specialized requirements related to HVAC and other infrastructure.

That demand for more modern space has sparked development nationwide. Construction, including speculative development, is on the rise in many markets across the country. Nationally, there was 16.9 million sf of new warehouse/distribution space completed during first quarter, according to Reis. The busiest metros were Atlanta at 3.9 million sf, Dallas at 2.4 million sf, Chicago at 2.3 million sf, and Memphis at 1.5 million sf.

Louisville has had a front-row seat to the e-commerce building boom. In addition to its UPS hub, the metro also has a 6,000-acre re-purposed military ammunition facility known as River Ridge across the river in southern Indiana.  This park has received a mega-site designation for larger users and is home to many automotive suppliers, as well as a 1 million-plus sf Amazon facility.  In addition, the park is only about one-eighth developed.

“That has been a very active and dynamic market over there, and we are waiting to see how that plays out,” Leffew says.

According to CBRE, the Louisville industrial market has grown by more than 10 million sf since 2013, while vacancy as of first quarter remains at a healthy 4.7 percent. In addition, there is a massive amount of speculative development going on the Louisville metro with more than 4 million sf of space underway or planned. Despite that activity, banks are more conservative on construction lending. So far, construction financing has been pretty well mitigated as it relates to equity, proposed debt service coverage, and sponsorship, according to Leffew.

Access to construction financing will likely be “the great equalizer” that keeps developers in check, he adds. SEE IT ALL: https://www.ccim.com/cire-magazine/articles/2016/09/industrial-roars-ahead/

ARE YOU READY TO SELL OR PURCHASE YOUR LAND OR COMMERCIAL BUILDING IN PHOENIX, SCOTTSDALE, MARICOPA COUNTY AND PINAL COUNTY, ARIZONA,  CLICK HERE  AND PLEASE CALL ME.     520-975-5207 or email me walterunger@ccim.net.  ….  VIEW ALL OF WALTERS LISTINGSLet me know if you are interested in Apartments: CLICK HERE FOR APARTMENTS FOR SALE     

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WHY PHOENIX? AMAZING!!!  POPULATION IN 1950 – 350 K PEOPLE; “NOW 5 MIL”. – “5TH. BIGGEST CITY IN USA”

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Why Phoenix?  This is a very interesting article, you should read it, amazing, there were only 350 K people living in Phoenix in 1950

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Facts of Arizona – year 1848 to 2013

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