Picture a giant metal cylinder dotted with holes in its walls and large truck bays at its base. Then picture an army of drones flying into and out of those holes and leaving with video games, books, clothing and groceries that they then deliver to customers in urban areas.
Sounds like science fiction, right? But what if you discovered that Amazon this summer applied to patent this very tower, which most are describing as a space-age beehive? Would it seem as far-fetched then?
That drone beehive might or might not become reality. But the fact that Amazon is considering it speaks volumes about the high-tech world of transportation and logistics. This tech revolution hitting the industrial supply chain was definitely on the minds of the speakers and panelists at Chicago Industrial Properties’ 14th annual Transportation & Logistics Conference held oct. 20 at the Oak Brook Marriott in Oak Brook, Illinois.
Richard Thompson, international director of supply chain and logistics solutions with JLL, focused on the changes that technology continues to bring to distribution centers, during his keynote presentation.
And the biggest change? There’s been a reordering in the big three costs of operating a distribution center. Traditionally, freight was the biggest cost, Thompson said, followed by labor and inventory.
Today, labor has jumped to the top of this list of costs.
Why? As Thompson said, companies today are opening a greater number of smaller distribution centers across the country. Amazon, of course, is leading the pack – by a lot – with more than 250 centers across the United States. With more centers comes the need for more labor.
And today’s higher-tech distribution centers also require a greater number of workers. Thompson said that a traditional 750,000-square-foot distribution center could require about 100 workers. But a business-to-consumer fulfillment center of the same size can require three to 10 times this number of workers.
“Think about that,” Thompson said. “Labor has become the most important cost that companies face today, especially with where unemployment is at. A facility with the same footprint today requires three times to 10 times more labor. That adds up.”
Ecommerce, of course, means that customers today increasingly want same-day or next-day delivery. Thompson said that it wasn’t that long ago – the 1970s, actually – when customers were happy to wait six to eight weeks for an item they ordered from the back of a magazine. Today, they get impatient when an item shows up on their doorstep three days after they ordered it.
Because of the ecommerce boom, then, expect more companies to open more distribution centers across the country, with many opening them closer to the urban centers of cities like Chicago, Thompson said. He quoted an interesting statistic: 87 percent of users say they expect to increase their number of distribution centers by 2020. That’s a lot of future construction activity, and with it expect plenty of efficiency gains in the supply chain to arrive, Thompson said.
Thompson said that 83 percent of users say they expect to relocate their distribution centers by 2020, even more good news for the commercial real estate construction business and the industrial sector. Others say they will focus on upgrading warehouse space to make it more efficient and tech-heavy.
The panelists sitting on the conference’s State of the Market session agreed with Thompson’s view that technology will continue to boost the efficiency of distribution centers.
Adam Roth, executive vice president of industrial services with NAI Hiffman, said that four years, most companies in the retail space had six distribution centers across the country. Today, those countries have an average of 18 distribution centers an average of 190,000 square feet each.
Roth expects this growth to continue, and he’s keeping an especially close eye on the grocery sector. This sector – the distribution of food to consumers – is one poised for big growth in the coming years, he said.
“Right now, grocery and food is near the bottom when it comes to digital sales,” Roth said. “But that is what everyone is going for now. That is where we’ll be seeing a lot of activity in the coming years.”
Jim Clewlow, chief investment officer with CenterPoint Properties, said that retailers will have to make important logistics decisions in the coming years.
“If you go to every metro area, industrial development is getting closer and closer to population centers,” Clewlow said. “There are very low vacancy rates in industrial as long as you are close to population centers.”
Retailers, though, will have to decide if same-day delivery is always the best option. For some products, next-day delivery might be good enough, Clewlow said. Those retailers who decide that not all of their products have to be available for same-day delivery might be able to save on real estate, transportation and labor costs, he said.
Last-mile industrial remains a hot topic, and the panelists here said that the challenge remains finding space to build distribution centers close to the center of cities. Often, municipal officials are reluctant to approve an industrial project so close to their population centers.
Brian Quigley, executive vice president with Conor Commercial Real Estate, said that many former big-box retail stores could serve as quality homes for distribution centers. The challenge is that many municipal officials want to see those spaces remain as retail uses, even if finding new tenants is a tough challenge.
“Trying to turn a retail-zoned property into one zoned for industrial is not easy,” Quigley said. “Municipal officials say that we are asking them to take sales tax dollars out of their coffers. It’s a tough sell to try to explain to them that it could become an ecommerce center that would generate even more revenue.”
Another option for urban distribution centers is to go vertical, of course. The possibility of multi-story distribution centers is no longer as far-fetched in many areas of the country.
But in Chicago? The city isn’t quite ready for this innovation yet, said Neal Driscoll, vice president with Liberty Property Trust.
“Chicago is a long way off from multi-story warehousing,” he said. “I just don’t see the right opportunity for that here. There is simply too much industrial space already out there to start building something vertical.”
Other speakers at the conference included Brian Liston, president of Liston & Tsantilis; Michael Sullivan Jr., chief executive officer and founder of PEAK Construction; Daniel Cawley, president and founder of Cawley Chicago Real Estate; Reggie Greenwood, deputy director of Chicago Southland Development Corp.; and John Noak, mayor of the Village of Romeoville, who sat on the Development & Contruction Trends panel.
The conference wrapped with the Investment Strategies Panel with Dan Botich, senior economic dvelopment professional with SEH of Indiana; Eric Pitcher, regional manager of economic development with BNSF Railway Company; Michael Brennan, chairman and managing principal with Brennan Investment Group; Alisaa Adler, managing principal and managing broker wtih Podolsky Circle|CORFAC International; and Adam Moore, senior regional director with First Industrial Realty Trust.
