The introduction of e-commerce in industrial real estate seems to be here to stay
The e-commerce boom continues impacting industrial real estate, and it’s emerging as the big winner
The industrial market is evolving with advanced technology in the retail and logistics industries and consumers’ demand for quicker delivery of products.
Industrial real estate might not be the sexiest product type, but right now it’s red-hot thanks to the rapid growth of e-commerce and the changing habits of today’s consumers, which are driving demand for space.
There’s been a big spike in the development of massive distribution centers and a mad rush by e-commerce players and retailers for well-located “last-mile” fulfillment centers located near population centers to meet consumers’ needs for fast product delivery. The Last Mile is essentially the last leg of the product’s trip before it arrives on the consumer’s doorstep.
This new “retail model” requires distribution centers that are compatible with online purchases, complete with state-of-the-art technology and high ceilings, and located near population centers, reports Commercial Property Executive. The development of these modern facilities continues as Amazon, one of the biggest players in the game, and Walmart, which is turning on its e-commerce game, are demanding them.
Industrial is the big winner
These current trends mean that industrial landlords are enjoying record-high rents and increasing property values – and space is extremely tight. In fact, the U.S. industrial vacancy rate is at an all-time low, at 5.3%, according to Cushman & Wakefield.
“Certainly, there’s no question that e-commerce is driving the demand up for a whole bunch of different reasons,” Jim Clewlow told Goby. Clewlow is chief investment officer at Chicago-based industrial real estate company CenterPoint Properties. CenterPoint invests in major coastal and inland port logistics markets. “One reason is they demand more inventory. If you look at the inventory ratios of what companies hold today vs. what they were holding just three or four years ago, they’re holding much more inventory because of the fulfillment and they demand more space.”
For example, Amazon continues broadening its product and services offerings. It sold 368.8 million products as of December 1st, 2016. It’s estimated that e-commerce requires three times or more logistics space that brick-and-mortar retailers do.
Being near consumers is critical – and finding space is challenging
One of the biggest changes is that in the past it was important to locate your industrial facilities near labor pools. Today, it’s important to be near populations for e-commerce logistics benefits, Clewlow told Bisnow, which reports that successful industrial developers are involved in all major points of a distribution chain. About 60% of CenterPoint’s portfolio is classified as infill.
However, retailers may have to get creative to get closer with these last-mile distribution hubs. A new study by CBRE found that these hubs now extend no farther than six to nine miles away from 15 major metro statistical areas.
Fueling this activity is the increase in same-day delivery services by Amazon, Walmart, Instacart, Google Express, and others, which requires easily accessible warehouses. They’re typically smaller buildings and infill sites that serve, for example, Amazon Prime’s two-hour delivery service.
Are logistics facilities changing to meet these standards?
Clewlow points out that logistics facilities are not a new concept; however, what is new is the advanced technology in fulfillment and the need to get closer to the consumer.
“We bought an old Sears facility built in the late 1960’s and that’s what they were doing there [fulfilling orders],” Clewlow says. “They had their own trucks. Sears, J.C. Penny, Marshall Field — there were lots of catalog houses where you would make an order and they would fulfill that order in these buildings. So this has been going on as part of the industrial function.”
However, technology is the big disruptor
“But the technology is different,” he says. “People no longer use catalogs. They’re going to Amazon and it’s a click. They say, ‘Hey, I need this book or flashlight,’ and where it was limited to a few items, now you basically can get anything… [Logistics] is really just being repackaged.”
Today, it’s about speed, accuracy, and personalization
“Amazon has the ability to track what your orders are,” Clewlow says. “That’s the difference – the size of their infrastructure, the speed at which they can deliver it to you, and the way they’re customizing it based on customers’ needs and preferences… Amazon has captured a way to do it faster, cheaper, and more customized. They’re just better at it. How’s that possible? It’s technology. As much as they’re a logistics company, they’re a technology company.”
“If you said, ‘Jim, are fulfillment buildings today different than they were 20 years ago?’ Not really. ‘Are they located in different spots?’ Not really. ‘Is it a different function?’ Not really. ‘’But are they doing it better?’ Oh yeah… ‘Are they doing it faster?’ Yes. ‘Do they know what your needs are?’ Yes. ‘Is it at a lower price?’ Generally speaking, yes. ‘Are they beating the pants off in terms of pricing and speed?’ For the most part, unless you tell me different. But it’s hard to compete with them with the vast array of offerings that they’ve got.”
E-commerce is big business
In 2016 alone, U.S. consumers bought about $400 billion of goods online, and e-commerce sales have been increasing by about 15% per year. Experts say e-commerce will only continue to grow, and we’re just in the early stages of how it will impact logistics real estate.
“If Amazon can take it from where Walmart was in 2005 to where we are today, 12 years later, where are we in 2027?” Clewlow asks. “Are things digitized? People keep on talking about 3D printing. Is that what’s around the corner? Is it drones? I don’t know… I just know things are changing so rapidly, so it’s hard to know what’s next.”