Logistics Firms Remain Hungry for Space
The COVID-19 pandemic has created opportunities and challenges as logistics providers continue to strive for last-mile efficiencies.
The logistics industry is having a bit of a Charlie Brown moment. After years of working to kick the football through the uprights and score big in developing fast, cost-efficient last-mile strategies, the pandemic is proving to be another game changer.
Logistics firms have benefited from a surge in e-commerce that is feeding demand for more space. At the same time, supply chains need to adapt to a huge shake-up in where people are living and working that has further complicated last-mile delivery. Amid this disruption, logistics companies are trying to solve the same fundamental issues: How do they get products in the hands of consumer or business customers more quickly? And how do they improve cost efficiencies in last-mile delivery?
“We have had a number of things converging at once. It wasn't just the pandemic, but the pandemic has shined a spotlight on several issues that were evolving,” says John Dohm, SIOR, CCIM, a partner at Infinity Commercial Real Estate in Miami Lakes, Fla. The logistics industry is dealing with advances in technology that include automation, robotics, and autonomous vehicles, as well as sensors and radio-frequency identification (RFID) codes that not only track shipping containers but track every individual item within those containers. Simultaneously, the logistics industry had to account for new and changing omnichannel delivery models, including click-and-collect and curbside pickup, not to mention the need to account for the return of goods.
What does all this mean for the supply chain? More changes ahead. In addition to thinking about the amount and location of space, a company also must look closely at the different types of space required based on what part of the supply chain it serves, notes Dohm.
The pandemic has put added pressure on supply chains and pushed companies to rethink how goods flow along that chain from first mile to last. “COVID took the industry from perhaps the first inning to the third or fourth inning, but we have a long ballgame still to go in the last mile,” says K.C. Conway, CCIM, MAI, CRE, chief economist for CCIM Institute and principal of Red Shoe Economics. Costs for last-mile delivery remain notoriously high, accounting for 40 to 50 percent of a company's logistics costs, according to some industry reports. On the consumer side, there are two main logistics models. One is the Amazon model, where products are being delivered direct to the doorstep. Another option is the click-and-collect model. “I don't think the Amazon model is sustainable from a cost standpoint,” Conway says. “Even Amazon admits that it can't continue with its last-mile cost burden the way it is currently structured.”
The changes occurring in supply chains will push CRE professionals to sharpen their site-selection skills. The costs associated with not getting the logistics right, such as insufficient truck docks or access to facilities through roadways prone to heavy traffic congestion, can be hugely expensive. “As companies look at how COVID-19 changed demographics and where people work, the skillset required to do site-selection analysis needs to be much more robust,” Conway says. “Industry pros can benefit from beefing up site-selection skills, because I think we are going to see new site-selection activity over the next two years that we haven't seen in a long, long time.”
Appetite for Construction
The pandemic greatly accelerated e-commerce sales. According to the U.S. Census Bureau, e-commerce as a percentage of total retail sales increased from 11 percent in 2019 to 14 percent in 2020, with a total spending of $791.7 million on online purchases. It is estimated that for every $900 increase in e-commerce sales, there is one additional square foot needed for distribution space, notes Joseph Fisher, CCIM, president of Fisher Investment Real Estate in Indianapolis. “As we see these huge increases in online retail sales, that indicates a healthy need for increased distribution,” he says. That said, there are some counter forces to that demand, including logistics facilities that are becoming more automated and efficient, which allows occupiers to get more revenue out of existing space per square foot, Fisher adds.
Market fundamentals in the North American industrial sector remained strong throughout 2020, and first quarter net absorption reached 82.3 million sf, according to Cushman & Wakefield. That is the highest first quarter absorption the firm has ever recorded. Cushman & Wakefield also is predicting that demand from e-commerce and a heightened focus on supply chain resiliency will drive robust leasing activity, record construction, and all-time high rental rates in 2021 and 2022.
“The pandemic really accelerated about 10 years of e-commerce adoption into a single quarter last year. Consumers literally changed their buying habits overnight due to stay-at-home orders,” says Adam Marshall, CCIM, SIOR, a senior managing director at Newmark in Chicago. Retailers had to scramble to offer new and better ways to shop at home, forcing them to increase distribution space near population centers or hire third-party logistics providers to handle that e-commerce fulfillment. In Chicago, for example, demand for distribution space is pushing location strategies into some areas that may have been overlooked prior to the pandemic, such as large redevelopment sites within the city of Chicago and close-in suburbs. “That, in turn, has increased land values and lease rates across the board,” Marshall says. Speed to occupancy also is very important right now, and new Class A spec buildings that are complete or near completion are in high demand, he adds.
“Prior to the pandemic, demand for distribution centers and industrial properties was pretty high, and the interest in that logistics real estate space has only grown in the pandemic,” says Carter Andrus, president of the Central Region at Prologis Inc. Certainly, the surge in e-commerce has spurred demand for more distribution and fulfillment space. Prologis reported in its 4Q2020 earnings call that it signed 65 msf of new leases globally in the fourth quarter. New leases in particular rose 22 percent year-over-year on a size-adjusted basis. Although a broad range of customers signed new leases in the fourth quarter, e-commerce activity accounted for 19.8 percent of new leasing.
Another factor boosting demand is that companies have been reassessing inventory levels and moving from the leaner “just-in-time” model to “just-in-case” inventory, which is creating more demand for space. “That was one of the lessons to come out of the pandemic, where some companies lost revenues because they didn't have the stock on hand,” says Andrus. Supply chains also are having to deal with reverse logistics, which is creating demand from the goods coming back into the supply chain, he says.
Strengthening Supply Chain Efficiency
Companies look at how quickly, how reliably, and how costly it is to move goods along the entire supply chain. Transportation costs and related infrastructure both have a big influence on location decisions. The top three issues when it comes to site selection for logistics locations are the overall adequacy of the infrastructure, demographic growth and shifts, and the fiscal health of states and cities, notes Conway.
Ports are still a prime focus because the U.S. is still an import nation. The ports have done a really good job in keeping up with infrastructure by dredging deeper channels, adding cranes, and supplying terminal space that can handle bigger ships. However, other infrastructure — such as intermodal rail, highways, and utilities — must connect to ports, notes Conway. Companies look for insights on infrastructure in the American Society of Civil Engineers' quadrennial infrastructure report that identifies weaknesses and where more investment is needed in the nation's highways, bridges, utilities, ports, and rail networks. “Companies are not going to go where there is failing or underfunded logistics infrastructure,” says Conway.
The pandemic greatly accelerated e-commerce sales. According to the U.S. Census Bureau, e-commerce as a percentage of total retail sales increased from 11 percent in 2019 to 14 percent in 2020.
Another challenge for logistics companies is that people sitting at the end of some last-mile supply chains up and moved during the pandemic. People relocated out of major urban centers such as New York and San Francisco and scattered to the suburbs, secondary and tertiary markets, or different parts of the country that were less impacted by COVID-19. Migration reports published by U-Haul and North American Van Lines offer some clues as to where people are moving and where supply chains need to expand or contract. According to U-Haul, Tennessee was the number-one state for inbound migration, followed by Texas and Florida.
Overall, demand for space is widespread across the country. “Where we have seen some outperformance is in key locations along supply chains and near large populations, such as Southern California, New Jersey-New York, Dallas, Atlanta, Central and Eastern Pennsylvania, and Indianapolis, to name a few,” says Andrus. There are some good consumption drivers and barriers to new supply in those areas, which have produced some outsized growth, he says. However, it is a little bit of a high tide raising all boats, since secondary and tertiary markets also are benefiting from the demand for space. Supply chains are still serving those secondary and tertiary markets, just at a different scale, he adds.
Consumer expectations for fast delivery are driving the race for quicker, cheaper last-mile solutions. “We are getting more and more used to getting things not only same day, but in the case of things like groceries, even in the same hour,” says Fisher. Those solutions often target close-in real estate opportunities. In Indianapolis, that demand has pushed values higher for older warehouse facilities that are more centrally located to the population.
In Chicago, the O'Hare market has been going through a redevelopment cycle for the past 15 years, where older manufacturing facilities are being razed to make way for new, more efficient Class A distribution space. “We've seen that for a long time in O'Hare, and now we're seeing it in the closer-in suburbs and in Chicago itself,” notes Marshall. “Amazon is the leader in supply chain strategy, and they have probably perfected the last-mile supply chain, but we're starting to see others follow suit,” he adds. For example, instead of having one or two large distribution centers in suburban Chicago, Amazon is sprinkling these facilities throughout the metro area. In 2020 alone, Amazon committed to over 14 msf of new leases or build-to-suits in greater Chicago, notes Marshall.
Struggles in the retail sector that have been further compounded by the pandemic could potentially create opportunities for retail-to-industrial conversions in big-box retail and distressed malls.
Demand for last-mile locations is driving solutions that include occupiers that are willing to accept older facilities in as-is condition. For example, Prologis purchased the former Greyhound bus terminal in the Arts District in downtown Los Angeles. The 120,000-sf facility sits on eight acres and also has rooftop parking. Although it is an older facility with 18- to 22-ft. clear heights, Prologis has several potential users that are interested in the facility as-is because of its dense urban location, parking, and drive-thru capability that make it a nice delivery location, notes Andrus. “Real estate is location, location, location, but particularly so with some of these last-touch, last-mile facilities,” he adds.
Struggles in the retail sector that have been further compounded by the pandemic could potentially create opportunities for retail-to-industrial conversions in big-box retail and distressed malls. Retail locations have long been discussed as an attractive alternative for last-mile distribution due to proximity to dense population areas. Some of the stumbling blocks to those conversions have traditionally been high land and building costs, neighborhood resistance, and difficulty in obtaining needed city approvals and zoning changes. “On paper, repurposing retail centers to industrial makes a lot of sense, but the reality is that it is difficult to do,” says Marshall. However, more success stories could provide some added traction for those retail-to-industrial conversions.
Last mile has the potential to be very efficient, but it's going to depend on significant advances and applications of new technology. Additionally, supply chains will need to continue to evolve along with new technologies and new delivery models and methods. Drivers, for example, are all fighting for curb space for pickups and deliveries. “I think we are going to see a lot more of that, and it's going to have to be solved by technology,” says Dohm. Companies will need to rely more on apps, cellphone location technology, autonomous vehicles, drone aircraft, and robots. In the future, that technology will drive greater efficiencies across supply chains and open more location opportunities, making it feasible for companies to squeeze into older, infill locations, he adds.
For more on this topic, check out CCIM Institute's "Last-Mile Logistics: The Final and Most Expensive Link in the Supply Chain."