Demand for e-commerce distribution space continues to shake up the industrial landscape across the country. In a recent study, CBRE looked at the 100 largest industrial and logistics (I&L) leases completed in the U.S. in the first half of this year, and found a number of trends.
Chicago was a top target for this activity, completing 11 deals for 6.8 million square feet of I&L leases, trailing only California’s Inland Empire, Atlanta and Pennsylvania’s I-78/I-81 Corridor. But what, exactly, is driving tenants into these larger spaces?
Logistics
Access to the country’s third-largest metropolitan area is of course one reason, as e-commerce goods need to go where the people are. “If you look at the transactions that are being completed, they are typically consumer goods, or retail or food-related,” said Traci Buckingham Payette, executive vice president with CBRE. “Being as close as possible to the population is very important.”
Chicago’s central location geographically also has an impact, just as it did during the dawn of the railroad 150 years ago. The region is home to the largest inland port in the country, with the Union Pacific and BNSF intermodals in Joliet and Elwood receiving and delivering an incredible amount of shipments.
Those intermodals take in shipments from the coasts and redistribute it locally, regionally as well as across the country. The metro area also has a robust infrastructure in place, including airports, interstate highways and Class I railways.
E-commerce and logistics firms are driving the majority of large leases as more consumers turn to online shopping. CBRE’s analysis found that 56 of the 100 largest I&L leases were signed by e-commerce companies and third-party-logistics firms. As Chicago is a vital market for the industrial supply chain, the trend here will not only continue but likely expand.
Consolidation
According to Buckingham Payette, this appetite for larger spaces will remain consistent, not just because of e-commerce demand, but user consolidation. Companies seeking more efficiencies in their supply chains will likely look to merge smaller, disparate locations into larger spaces in fewer locations.
Consolidation can take on a number of forms, depending on the user. If a neighboring facility is demolished, for example, a long-time site owner may look to expand into that space, if there’s a need, and bring in services that they were conducting elsewhere. Or as a lease approaches the end of its term, a tenant will likely scout the area for new, Class A space big enough to accommodate their various functions.
“Users are looking at their overall footprint and saying, ‘could we be more efficient if we consolidated some of our regional facilities into one?’ Or even looking at their national distribution network and determining should some of those be consolidated,” Buckingham Payette said. “It’s really driven by efficiencies, but also by the user and the changes that are happening in the retail world as a whole.”
The activity surrounding e-commerce and consolidations are driving demand for large I&L spaces, but not to the point, perhaps, that the development streak will continue at the pace it has here in Chicago. Buckingham Payette believes that the metro area has a surplus of large inventory that will lease up within the next 12 months, after which larger spec construction will start back up.
“Here in Chicago we may not see as many spec buildings breaking ground on 750,000 square feet or greater, just because of our inventory,” Buckingham Payette said. “We have quite a bit of product available and I think we have to get some of that off the market.”
Tenant needs
Nearly a third of the largest leases during the first half of 2018 were for warehouses over 750,000 square feet, according to CBRE’s research, spanning a cumulative 67.8 million square feet. These large leases reflect e-commerce users’ preference for expansive facilities with high ceilings and modern specifications for rapid inventory movement. Beyond that, tenants large and small have a universal need: parking.
“On a spec basis, developers try to build that into the design in some way, to be able to have additional car parking for all the employees that are coming into these facilities,” said Buckingham Payette. “I think that trend for car parking is more geared toward the larger, e-commerce spaces. Trailer parking, however, I feel like we see that in any size range.”
As goods come in—either through the huge intermodals or even to a tenant in a subdivided space—speed of unloading one shipment and getting to the next is paramount. Having additional trailer spots available for when the docks are full is a need that any size logistics firm is always looking to fill.
With the American consumer showing no slowdown in the number of online purchases, and with companies eyeing the bottom line on their ledgers, the need for large warehouse space should continue for some time.
