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As delivery times drop, warehouses flourish

By Joanne Bestall | Joanne.Bestall@am.jll.com | @JoBestall

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Want to invest in the latest holiday shopping rush? It’s not too late—take a look at warehouses.

Despite the relentless post-Thanksgiving media coverage of American shoppers trampling each other on what is supposed to be the year’s biggest shopping day, in reality those crowds are thinning every year as more and more consumers choose to do their holiday shopping online.

Black Friday sales dropped 11 percent last year. Cyber Monday sales, meanwhile, grew 8.5 percent and according to IBM Corp.’s Digital Analytics recent Benchmark report, online sales grew 13.9 percent from Nov. 1 to Dec. 31 compared with 2013’s holiday season. And while that growth may appear to bode well for online retailers, they also face a slew of challenges. Price competition online is brutal, for instance. And delivery times keep shrinking, raising consumer expectations—and expanding the challenges for retailers.

omni-channel logistics model (image)

“Amazon has trained consumers to expect their orders to be there the next day,” says Mark Richards of Associated Warehouses.

Not that Richards is complaining. One result of ever-compressing delivery times is that retailers are building more warehouses than almost ever before. According to Kris Bjorson, International Director at JLL, 30 percent of all warehouse space is in some way related to e-commerce.

That is elevating warehouse space needs, which has recovered from the wake of the prior recession and is posting solid gains. In the third quarter of 2014, the vacancy rate for industrial properties was 7.2 percent, down 3.8 percent from last year, according to JLL’s third quarter North America Industrial Outlook. When the numbers for the full year are out, vacancy rates could be as low as 6 percent. The tighter market has driven rents up 4.4 percent from a year ago.

“We had a period where people were consolidating and rationalizing their networks,” says Richards, whose company works with third party logistic providers. “Now, because of the pressure of instant gratification, retailers are starting to hold more inventory which means more warehouses.”

The way Bjorson sees it, the retail/e-commerce distribution market has developed in waves. The first wave was focused on e-commerce companies building big warehouses (up to 1.5 million square feet) in states that didn’t charge sales tax. The second wave, occurring now, is about spreading those large omni-channel warehouses to locations within a day’s drive of major cities and in close proximity to the major ground transportation service providers.

“The third wave will be about reaching customers in second tier markets,” says Bjorson. “Buildings 500,000 to 750,000 square feet near transportation providers.”

Cap rates in tier-one cities are shrinking, so the best way to take advantage of the warehouse boom is to look outside of places like New York and Chicago and focus on locations like Atlanta, where developers are constructing warehouses even before they’ve signed tenants.

Construction in Atlanta is booming, up 104 percent from three months ago, and according to JLL’s third quarter North American Industrial Outlook, demand currently outstrips supply in larger size segments. “We’re seeing a lot of investment activity in the Southeast where leasing market fundamentals are tightening,” says Dain Fedora, Research Manager Americas Industrial at JLL. “Speculative construction is making comeback.”

Global B2C ecommerce sales (image)

Bjorson believes the fourth wave will be smaller local depots, close to cities, that enable same-day delivery. But questions like how many warehouses and how close to cities are still open. The answers will partly depend on what consumers want. Within the e-commerce world, there’s debate about what kind of goods people really need delivered the next day.

For a big company like Amazon, delivery can be a loss leader. The giant e-tailer can afford to buy a building across the street from the Empire State Building in New York City to essentially use as a giant warehouse.  But for smaller retailers, same day delivery is expensive. It means either hiring local staff to deliver goods from stores or storing sufficient inventory in warehouses located not just close to major population centers but to smaller cities too.

eBay tried to make it work with a same-day delivery app called eBbay Now. The company only charged $5 extra per purchase for same-day shipping in San Francisco. But the logistics proved to be a nightmare and the company has essentially shuttered the service.

Part of the problem was that it turns out customers don’t really care about same-day delivery on all items. It usually doesn’t matter if a new pair of shoes or a screwdriver ordered online arrives the same day or two days later and if the two-day shipping is free, most consumers will choose that option.

“Same day delivery is big in Europe where it works for groceries,” says Bjorson. “I think it will also work here for things like medical and auto supplies—mission-critical stuff.”

Once the dust settles, the emphasis is likely to be more on “everywhere commerce,” meaning consumers can buy where they want, online or in a store, and receive their goods at home, at the store or at another pickup location like an Amazon Locker. That scenario would still require more, bigger warehouses—a fifth wave, perhaps?


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