Cushman & Wakefield‘s Industrial Services for the Americas and Research for the Americas teams this week released a report that revisits several shifts widely anticipated by supply chain and real estate professionals at the start of the market recovery. “Reality Check: Evaluating Seven Industrial Real Estate Predictions” looks at how closely the industry has tracked to expectations, and highlights the trends that are worthy of continued consideration as companies address their supply chain strategies.
“As the U.S. economy started to creep down the road to recovery, fundamental shifts in retail shopping patterns and manufacturing strategies were beginning to manifest themselves in the industrial landscape,” noted Cushman & Wakefield’s John Morris, leader, Industrial Services for the Americas. “A variety of industry watchers and media outlets contributed to the buzz, and we made our own predictions about which trends would likely bring wide-reaching, lasting changes and which were likely to be short-term blips.”
The Cushman & Wakefield report examines the impact of e-commerce, changing consumer behavior, the reshoring of manufacturing, and the shifts in facility location and design.
PREDICTION 1: E-commerce growth will outpace growth in overall retail sales, causing fundamental shifts in order fulfillment strategies and models. Status check: On track The growth of online retail sales as a percentage of total retail sales is showing no signs of slowing. Forester Research Inc. projects it will reach 11 percent by 2018, up from about 8 percent today. “The new retail ecosystem will require more warehouses (many of them highly specialized), different methods for the delivery of purchases, and new hybrid fulfillment center formats,” Morris said.
PREDICTION 2: To meet e-commerce service expectations for a new kind of shopper, DCs will be located closer to urban centers. Status check: On track “As delivery evolves from two-to-three-day models to one-day and same-day delivery, facilities are frequently being clustered closer to population centers,” Morris noted. E-commerce is fueling new DC projects in major regional distribution hubs like Dallas, which currently has 16.0 million square feet under development. Demand around the edge of major cities for smaller infill facilities is on the rise, a response to the increasing trend toward same-day fulfillment.
PREDICTION 3: Warehouse/Distribution centers will continue to grow bigger. Status check: On track The average warehouse/distribution facility in the U.S. is 42 percent larger than it was in 2000. And mega-sized distribution centers greater than 1.0 million square feet are becoming more prevalent in several markets. “When it comes to supply chain advantages, these giant facilities allow companies to experiment with different fulfillment strategies and respond to the demands of high-turnover online retailing,” Morris said.
PREDICTION 4: Clear heights will continue to rise as fulfillment facilities require more sophisticated levels of automation and efficient use of space. Status check: On track “As warehouse distribution buildings have been expanding out, their ceilings have been going up,” Morris commented, adding that direct-to-consumer sales often require retailers to consolidate online and store-based fulfillment operations under one roof. The higher ceiling height improves racking options and maximizes pallet capacity by up to 25 percent in comparison to 32′ clear height. The higher formats increase cube capacity by up to15 percent as well.
PREDICTION 5: Demand for large, modern warehouse space will outweigh supply in primary hubs, pushing activity into secondary markets. Status check: Wait and see Although it is true that secondary markets have seen an increase in development, activity in primary markets has been stronger, particularly in core markets. But if top markets are not constrained yet, that scenario may not be far off, according to Morris. “Companies seeking good highway access, proximity to intermodal or ports, and strong labor are finding it increasingly difficult to secure sites that meet these criteria,” he said.
PREDICTION 6: Construction costs, construction labor supply and growing product demand could present challenges to progress, both for developers and end-users. Status check: On track Construction costs for industrial product vary by city and market. New York/New Jersey and Chicago saw the most significant increases (10 percent and 5 percent respectively) in average costs in the last year. “These escalations are mainly due to rising labor costs (up 2.8 percent in the last year) and land constraints in the face of strong demand,” Morris explained. “Overall development costs will likely continue moving up.”
PREDICTION 7: Reshoring will bring more jobs, capital investment and demand for industrial space back to the U.S. Status check: Between on track, and wait and see “While the debate about how much reshoring is actually taking place continues, there is no doubt it is happening, and companies are at the very least examining their options more closely,” Morris observed. In a 2012 Boston Consulting Group (BCG) survey, 37 percent of U.S. manufacturers with sales above $1 billion said they were considering shifting some production from China to the United States.
Clearly, several industry predictions are playing out as anticipated, though a few remain fluid. “As e-commerce adoption continues to grow at about 15 percent annually, and as manufacturing continues to be more cost- and service-justified in locations where demand is strong (like here in the U.S.), it seems likely that the market for industrial space will remain resilient,” he concluded.
