E-commerce activity driving increased demand for prime warehouse and distribution space

Given the ongoing proliferation of e-commerce and its subsequent––and wide ranging––impact on supply chain operations and processes in the form of things like increased automation, speed, cycle time, and order fulfillment and delivery, among other factors, it does not come as a major surprise that retailers and e-commerce shippers (e-tailers) are going head-to-head over distribution space in locations in close proximity to large populations.

That is one of the main takeaways from Chicago-based commercial real estate brokerage JLL.

In recently issued research and data, JLL pointed out that its market data indicates rents are on the rise, with companies on the hunt for warehouse and distribution space. And it added that 60 of its current tenants are looking for big box warehouses at 1 million square feet or more at a time when demand outstrips available locations by a nearly a 3:1 margin.

But even with a high level demand, spurred on by what JLL termed retailers bowing “to the demand for instant delivery gratification,” JLL said supply is not increasing at the same rate it has in previous “boom” cycles, which is also driving the increasing competition for space and rising rents. And it added that developers are cautious when it comes to speculative development, with investments in speculative DCs expected to be measured in the coming year.

In an interview with LM, Craig Meyer, president of JLL’s Industrial Group cited various drivers for the heightened demand for this space.

“A big significant factor has really been centered around ‘perfecting’ the supply chain, which is the confluence of technology and efficiency really coming together over this last cycle,” he said. “Retailers today and people on the warehousing and DC side view it as a scientific process and always look at product from way up the supply chain, from the point of raw materials to finished delivered goods in a way they could never do in the past. That has to do with the ability of technology to provide that visibility. When someone goes in and scans an RF code to an unmanned cash register at a store, that information is communicated at the speed of light. That provides the ability to know where that product has been from the beginning of its lifecycle to a point where it is delivered to the customer.”

This has in turn led to hyper-efficient, large-scale warehouses, with site selection having become very data driven, increasing the need for an ideal location to be able to deliver product within a timeframe that––depending on the retailer or the direct distributor, such as Amazon––wants to leverage, he added.

JLL said that in 2015, roughly 171 million square feet of new distribution space is expected to be completed in the U.S, which is the highest level in seven years, although it still trails the 40-year average of 178 million square feet.

What’s more, it noted that at the end of 2014, about half of 2014 construction activity was happening in the six largest U.S-based logistics markets: Los Angeles, Inland Empire, Calif., Dallas/Fort Worth, Chicago, New Jersey, Philadelphia, and Atlanta, which subsequently results in constrained supply in secondary markets.

Meyer said some of the key secondary markets are around Indianapolis, Phoenix, and Seattle and similar areas, where they may not need 1 million square-foot facilities but instead may require a 500,000 square-foot one to meet their needs.

“Over time, we are going to see continuing development and deployment of hyper-efficient warehouses and distribution space in the secondary market,” said Meyer. “The demand has been driven by a paradigm shift in warehousing and distribution and the growth of e-commerce and direct delivery to the customer, with consumers expecting delivery within 48 hours of ordering, and in some cases same-day delivery, which is viewed as a more minor part of the program.”

Another factor influencing demand is the re-emergence of online grocery delivery like Amazon Fresh, according to Meyer, as well as omni-channel distribution in which consumers can order things online and have them delivered to their home or do store pick up, or at a drop-off location.

These developments are a result of a gradually growing economy, with JLL seeing 19 straight quarters of positive absorption in the industrial real estate space, as vacancy rates continue to decline at a sub-7 percent vacancy rate, which Meyer said is a ten-year low.

“We are seeing very consistent demand on the supply side, with the construction on new warehousing space being disciplined,” he said. “Historically we have been averaging in the last cycle delivery of about 175 million square feet of new industrial product of buildings per year. In the last five-year cycle, though, it is down to 131 million square feet in 2014, and we are forecasting we might get to around 170 million square feet in 2015. Things are really tightening up.”