The disruptive shift to an e-commerce-fueled economy has created seemingly endless opportunity in industrial real estate. Companies across the board have a voracious appetite for warehouse, distribution, and fulfillment space, even as supply chain alterations and logistics infrastructures play larger roles in site selection.
E-commerce-related industrial leasing has exploded in the past decade. Industrial leasing deals in the U.S. and Canada jumped from less than 5 percent of deals in 2010 to now consistently representing 20 to 30 percent, according to Cushman & Wakefield.
Experts are predicting an even bigger runway ahead for e-commerce as online purchasing continues to expand into other sectors such as grocery, pharmaceuticals, and automotive. “This is the beginning stages of a structural change in the market that has really been tech-enabled on the consumer side. Now brands and businesses have to deliver on that,” says Jason Tolliver, regional vice president of logistics and industrial research at Cushman & Wakefield.
Instead of going to the store, consumers are going online and having purchases delivered to their doorstep. Rather than simply moving goods from ports and manufacturers to stores, the supply chain is much more complex, notes K.C. Conway, MAI, CRE, CCIM Institute's chief economist and director of research and corporate engagement at the Alabama Center for Real Estate (ACRE) at the University of Alabama. Even traditional retailers are tweaking their business models to reduce in-store inventory and rely more on warehousing and distribution centers.
“Logistics Infrastructure: Transformational Opportunities,” a new report by ACRE, examines where companies are locating and why to examine how logistics infrastructure is influencing decision-making. The report serves as a call to action for needed infrastructure improvements and upgrades.
The authors emphasize the value of investing in a “build it and they will come” strategy. ACRE's analysis of state-level gross domestic product in the U.S. reveals that states investing in logistics infrastructure are experiencing GDP growth exceeding the 3.5 percent national average. Markets benefiting from strong logistics infrastructure include Charleston, S.C.; Savannah, Ga.; Atlanta; Birmingham, Ala.; Mobile, Ala.; Kansas City, Kan.; Columbus, Ohio; and Trenton, N.J.
Location infrastructure is about more than concrete and asphalt, notes Conway, co-author of the report with ACRE colleague Stuart Norton. “You have to look beyond roads and bridges to all the elements of logistics infrastructure to attract the new industries you want,” he says. Logistics infrastructure critical to supporting modern supply chains include labor and training, utilities, Wi-Fi bandwidth, roadways, intermodal transfer stations, rail, and ports.
Revamping Supply Chains
E-commerce has created a high tide that is raising all boats in the industrial real estate market, pushing industrial vacancies below 5 percent nationally, according to Cushman & Wakefield. “It is the lowest vacancy that we have ever seen, and there is broad-based growth everywhere in primary, secondary, and tertiary markets,” says Tolliver. Markets near ports continue to do well, including Riverside-San Bernardino-Ontario, Calif., due to its proximity to the L.A. area ports, and Northern New Jersey, near the New York and New Jersey ports.
Growing demands on the country's aging logistics infrastructure, however, highlight a need for investment. An estimated 4.1 million miles of public roads require work. To maintain the railroads alone, budgets need to increase by 17 times current levels, according to the ACRE report. Given that backdrop, logistics infrastructure is driving “why” and “where” decisions for development across the country.
Often, a cohesive plan is not in place for an entire infrastructure network in a region. “The areas that have a more comprehensive view and don't stop at their particular portion of the supply chain are going to be those that have a network that is superior to others, and that is going to help draw occupiers that want to be there and take advantage of that,” Tolliver says.
Planes, Trains, and Ports
Real estate typically ranks as the second or third highest cost for most businesses. In terms of logistics, transportation and labor are the two largest costs. Transportation can account for nearly half of supply chain costs, while real estate typically represents less than 10 percent, notes Tolliver. Companies must have a solid transportation network - and the labor to support it - to allow for the efficient movement of goods.
Because of congested roadways, trucking inefficiencies, and driver shortages, the new supply chain is going to rely on shorter distance trucking while emphasizing rail for long distances, notes Conway. Locating near rail and intermodal transportation is going to be a necessity along with other key criteria, such as workforce and utilities. According to the ACRE report, some industrial markets that benefit from strong logistics infrastructure include Memphis, Tenn.; Columbus, Ohio; Greenville-Spartanburg, S.C., and Kansas City, Kan.
Those major hubs where e-commerce and logistics companies are concentrated all have some key infrastructure in common, including Class 1 rail and intermodal facilities, notes Conway. Intermodal centers are a vital part of logistics infrastructure, acting as a transfer point from one mode of transportation to another, such as moving shipping containers from ship to rail or rail to truck. Draw a line from New York to Texas, he says, and 85 percent of those intermodal facilities are located south and east of that diagonal line with very few to the west.
It doesn't matter whether product is coming from the East, West, or Gulf Coast, companies need to be able to get products off ships and where they need to be as quickly as possible. Often, truck is the best way to achieve this result, but as the trucking market continues to face challenges, companies are looking to shift goods to rail, especially for goods that are not time sensitive. “ There is also a good demand profile for refrigerated storage to follow right along with it for chilled or frozen cargo,” says Tolliver.
Air cargo is another important piece, one that's critical for smaller items such as electronic devices, lightweight manufacturing parts, pharmaceuticals, and other consumer perishables that must get somewhere overnight. However, big airports like those in Atlanta, Dallas, and New York are all trying to reduce air cargo, because it is not as profitable as air passenger traffic, notes Conway.
Columbus, Ohio, is one market that benefits from that shift in air cargo. Amazon is moving more of its air cargo to Columbus' Rickenbacker International Airport due to challenges getting air freight out of New York's airports. The e-commerce giant already has three major distribution and fulfillment centers in the Columbus market. The metro area also has an educated workforce with Ohio University nearby, and its economy is changing from relying on manufacturing to more tech-based. “Columbus is an example of a city that has figured out the air cargo logistics piece and how to combine it,” says Conway.
Supply Creating Demand
The report argues that “build it and they will come” can be a game-changer for logistics. Kansas City, for example, was long considered a tertiary market for most industrial space users and investors, primarily because of its size and distance from major population centers.
However, Kansas City has emerged as a growing logistics hub in recent years. “This is my 24th year doing industrial real estate in Kansas City, and, in my career, I have never seen a market as active as the one we've been in for the last five years,” says Nathan Anderson, CCIM, SIOR, a partner at NAI Heartland in Kansas City. The growth in e-commerce and a need to get product to customers in a day or two have spurred significant demand for industrial real estate in Kansas City. The addition of a new BNSF intermodal facility in Edgerton, Kan., in 2010 is another catalyst.
Local developer NorthPoint Development secured rights to develop industrial buildings around that BNSF intermodal facility. “That was a game-changer, and their timing couldn't have been better,” says Anderson. NorthPoint has since developed about a dozen buildings spanning some 7 million square feet in Edgerton, and it has additional developments in Kansas City and Riverside, Mo. Numerous companies have since moved operations to Kansas City, to create a regional hub. For example, Amazon now has six locations in the metro area, and FedEx and UPS also have expanded operations in Kansas City. Likewise, the activity has sparked interest from other national developers and investors, he adds.
Another important part of the supply chain for e-commerce and fulfillment companies is the relationship to the infrastructure for UPS, FedEx, and the U.S. Postal Service, adds Knowles. For example, FedEx recently located a 1 million-plus sf facility in the Lehigh Valley, just north of the Allentown International Airport. UPS also just added a similarly sized facility in neighboring Palmer Township, Pa. “Delivery is very important, which is why these companies have invested deeply in the Lehigh Valley,” says Brian Knowles, CCIM, SIOR, a principal at Lee & Associates of Eastern Pennsylvania.
The Northeast is a strong industrial hub that continues to benefit from its infrastructure, access to labor, and proximity to key urban markets. For example, central and northern New Jersey is a highly concentrated industrial market with about 1 billion sf of space. “Space is extremely tight right now with very few land opportunities, and values and rents that have escalated,” says Knowles. Just to the east in the triangle created by South New Jersey; Harrisburg, Pa.; and Scranton, Ohio, another 1 billion sf of industrial space spreads out across the Lehigh Valley.
“We are now seeing players and occupiers reaching into Eastern Pennsylvania for other alternatives versus along the New Jersey Turnpike,” says Knowles. Lehigh Valley has been the biggest beneficiary of that shifting supply chain due to its population density and availability of labor. The Lehigh Valley is seeing record high construction with about 30 million sf of industrial projects under construction, Knowles adds.
Real estate investors are keeping a close eye on the transforming logistics landscape. “Those who connect the dots on logistics infrastructure beyond roads and bridges will be the ones that figure out where the warehouses need to be,” says Conway. Some of the best indicators for the changing logistics infrastructure landscape can be found in looking at where major players such Amazon, Walmart, and Target are locating their fulfillment centers. Manufacturers also are looking for locations where they can connect to a port, rail, or intermodal facilities, which is why manufacturers such as Airbus, Volvo, and Toyota have opened new facilities in cities such as Mobile, Ala.; Huntsville, Ala.; and Charleston, S.C., notes Conway. “They are picking those locations where all of those location infrastructure elements are coming together or being improved,” he says.
For more on this topic, check out ACRE'S report "Logistics Infrastructure: Transformational Opportunities." Use promotional code “CCIM” at checkout for $25 off.