With increased use of online shopping, industrial property developers see strong and steady demand for a wide range of distribution facilities across the U.S. to service client needs.
Tom Bak, senior managing director in the Newport Beach, Calif., office of Dallas-based Trammell Crow Co., says demand for e-commerce facilities has been strong in recent years and could continue to present opportunities into the foreseeable future. Facility needs for online retailers differ from traditional existing properties, prompting construction of new and renovated developments. In some cases, smaller urban infill properties are needed to help speed up delivery of products to consumers, while facilities in less dense areas can top 1 million sq ft.
“Without a doubt, the greatest change agent is the e-commerce sector—it’s an agent of terrific growth for us,” Bak says.
Trammel Crow currently has 89 industrial projects in development, representing nearly 36 million sq ft of space, with a combined value of about $2.4 billion. Among those developments, 10 of them are more than 1 million sq ft in size. Some of those projects include Lehigh Valley Trade Center, buildings A and B, in Nazareth, Pa.; Principio Business Park in North East, Md.; Jefferson Mills, buildings D and F, in Jefferson, Ga.; King Mill Distribution Park in McDonough, Ga., and Oaks Industrial Center in Livermore, Calif.
Space utilization within e-commerce facilities is also very different from traditional distribution facilities, Bak notes. E-commerce can generate a high volume of returns, which need to be sorted and processed. More employees also are required to help process returns as well as push out products for fast delivery to shoppers. “It used to be 30 to 100 employees stocking 25 stores from a warehouse,” he says. “Now, it might 400 to 1,200 employees for [facilities] that offer same-day delivery.”
Industry data suggest that demand for e-commerce facilities could continue into the coming years. Global online sales were less than 5% of all retail sales in 2011 and are forecast to hit 8.6% this year, according to a white paper released in September by developer Prologis. By the end of the decade, market share will approach 15%, according to the report. The net effect for developers has been a spike in demand for distribution facilities. In 2011, e-commerce accounted for about 5% of new leasing; today, it is around 20%, according to Prologis.
Prologis, which has about 400 e-commerce customers occupying more than 50 million sq ft of logistics buildings, reports there is no one-size-fits-all solution for online retailers. Across its e-commerce portfolio, Prologis sees considerable variability in customer size, industry, geography and building requirements. Its e-commerce customer leases range from units smaller than 10,000 sq ft to more than 1 million sq ft, according to the report.
While Prologis is developing several new facilities larger than 1 million sq ft, the company sees significant growth in smaller facilities, as well, particularly infill projects.
In many cases, retailers are seeking infill properties to get closer to concentrations of customers and facilitate faster distribution, including same-day delivery.
Duke Realty is seeing similar trends, says Pete Harrington, executive vice president of construction. “We have activity in almost all regions of the country that we operate in,” he says. “We’re hitting on all cylinders and have a tremendous amount of starts that have really hit in the second and third quarter, primarily driven by e-commerce.”
Harrington says demand is largely location-driven, as is all real estate. “There’s demand to be closer to rooftops and closer to labor,” he says. “Getting appropriate labor is a big challenge. Even with the latest trends in robotics, it’s labor-intensive use.”
Although there is always high demand around major port cities, Harrington sees rising interest in secondary markets. “That’s where you find a lot of local developers competing for projects. Everyone is busy. There seems to be plenty to go around,” he says.