As e-commerce retailers such as Amazon.com grow and expand, there is correlating positive momentum being created in the industrial real estate market: the expansion of retailers’ online presence produces greater demand for distribution-center space across the country.
According to a recent white paper by Avison Young, this is particularly true in and near high-density metropolitan areas, and markets that serve as regional distribution hubs. This demand creates opportunities for owners and investors to position themselves for significant upside potential when buying and selling distribution-oriented assets.
“E-commerce is a strong economic engine that is touching many different industries,” said report author Erik Foster, an Avison Young Principal and industrial capital markets practice leader based in Chicago. “For commercial real estate owners and investors, there is great opportunity to capitalize on this growth in industrial assets, and generate strong returns for many years from this asset class. The demand for industrial space will increase with the importance of e-commerce distribution.”
The Avison Young report notes that one of the greatest benchmarks of the demand for warehouse and distribution space is the significant increase in the amount of occupied space. Since 2000, the amount of occupied distribution space has increased by 86.2 percent to 855.1 million square feet at the end of the first quarter of 2013 from 459.3 million square feet, according to CoStar. The change — almost 400 million square feet — represents an average annual growth rate of just more than 7 percent.
Old vs. new
The top tier in the distribution sector generally can be characterized by the following building features, according to Avison Young. They are newer facilities, typically built within the past seven years; typically feature 32-foot to 36-foot ceiling heights; offer 50- by 50-foot bay sizes; and have additional truck trailer storage and parking for e-commerce employees.
Craig Phillips, executive vice president of development at HSA Commercial, said taller distribution centers are more common now than they were in the past.
“With some innovations in racking systems, companies are able to make use of a taller building than they were in the past,” he said. “Whereas a few years ago we might have seen a 28-foot clear building, now we’re seeing 30-foot clear buildings and even 32- or 34-foot clear. It just allows these companies to utilize the volume of the buildings much more efficiently than they have in the past.”
The next tier of distribution centers generally can be characterized by the following building features, according to Avison Young. They were built eight to 12 years ago; typically feature 24-foot to 28-foot ceiling heights; offer 40- by 40-foot bay sizes; have additional trailer storage; and appeal to owners and tenants who want a lower price point and may not need top-of-the-line space or functionality.
In both new and older distribution centers, extra vehicular parking is a key selling point for many e-commerce retailers, the Avison Young report points out. These types of businesses often have a higher ratio of employees than other types of distribution-oriented businesses. Thus, rental rates may increase, as larger land sites are required for these facilities and the users typically must absorb those costs, according to the report.
Among the current trends in e-commerce growth is the movement toward same-day fulfillment. Amazon, Walmart and Home Depot are in various stages of testing same-day delivery and are making decisions about their distribution facilities based on those forward-thinking concepts, according to the Avison Young report.
“E-commerce has really made the need for a middleman obsolete,” Phillips said. “Users and consumers can order direct from the distribution centers. It just adds to the efficiency of the consumer model and allows distribution companies to react very quickly to consumer needs. I’m sure you’ll see very quickly some of the same day delivery model where if you order something by 10 o’clock, you might get it on your doorstep by 3 p.m. the same day. That’s an unparalleled level of service that consumers in Chicago can look forward to.”
Avison Young also notes that there is a shift toward locating distribution facilities in urban areas, where the population growth is, and near order-fulfillment companies, such as UPS, FedEx and DHL.
“I think most consumer companies are looking for ways that they can speed product to market,” Phillips said. “As an example, we’re hearing Amazon is looking for a 1 million-square-foot location around the Chicago and southern Wisconsin area to bring the same-day delivery model to the Chicago and Milwaukee area. Speed to market is what these companies are really trying to work on next as well as efficiencies within their own buildings.”
E-commerce growth
Population growth also is a driving factor in the increase in e-commerce and the correlating need for distribution space, according to Avison Young. Population in the United States is growing by an average of 2.5 million people annually. According to Dr. Glenn Mueller of the University of Denver’s Daniels School of Business, each person consumes goods that require approximately 50 square feet of warehouse space. This equates to new demand for 125 million square feet of space annually. The compounding effect of an uptick in population growth, and the rise in demand for e-commerce could be a significant demand driver for industrial real estate, according to Avison Young’s report.
Additionally, according to the U.S. Census Bureau, e-commerce sales rose 15.8 percent in 2012, reaching $225 billion. That figure has nearly doubled during the past seven years. Avison Young predicts that as consumers increasingly look to the Internet for ease of shopping and discounted pricing, those numbers are expected to continue climbing.
To that assessment, consumer research firm Forrester is projecting online retail sales will reach $370 billion by 2017 and continue to outpace the growth of physical retail stores. The 2017 number equates to a 10 percent compound annual growth rate over the next five years, according to Avison Young.
The Avison Young report concludes by noting that this economic shift will further strengthen the supply and demand drivers for the development, redevelopment and sale of distribution center space, a sector that saw more than 151 million square feet of new development since 2010, at the height of the post-recession economy.