The following is an excerpt of an article authored by Colliers’ National Director of Industrial Research | USA James Breeze, which appeared as the cover story on NAIOP’s Development Magazine.
The era of e-commerce began unceremoniously in July 1995, when Jeff Bezos boxed up the first book sold on Amazon.com from his Seattle garage. Over time, nearly all major retailers began selling and shipping items from their own websites. This is now having a monumental impact on the way goods are created and distributed — and on the industrial real estate necessary to do so.
By the end of the second quarter of 2016, e-commerce sales had grown 16 percent year-over-year, a rate that dwarfs the 2 percent overall retail growth for the same time period. Enormous e-commerce sales have been a boon to industrial real estate, with record-low vacancies and record-high asking rents, net absorption and development.
A majority of U.S. industrial real estate is concentrated in massive big-box distribution centers in core markets such as California’s Inland Empire, Atlanta, Chicago, Dallas, northern New Jersey, Houston and eastern Pennsylvania. Each of these markets is strategically located near a large population center. But not all of them are close enough to the demographic that is one of the biggest driving forces behind e-commerce: millennials.
Millennials grew up in a “one-click” world, where convenience is king. As millennials aged and their purchasing power grew, they continued to prefer the one-click lifestyle. Many moved to urban areas where they could live, work and play without having to get into their cars to drive to and from suburbs.
While big-box warehouses in core industrial markets represent the “first mile” of distribution, the “last mile” of distribution to reach this growing consumer base — to get goods directly to the purchaser’s home — is still being figured out. Real estate professionals generally define a last-mile facility as one from which goods are delivered directly to the consumer. What is clear is that last-mile distribution is becoming more reliant on urban warehousing to get products to consumers quickly while mitigating rapidly expanding supply chain costs.
This map illustrates a 100-mile radius around each of the largest regional fulfillment markets in the U.S., as well as the locations of the cities with the highest percentages of millennials.
Source: Headlight Data, Colliers International
The map above illustrates a 100-mile radius around each of the largest regional fulfillment markets in the U.S., as well as the locations of the cities with the highest percentages of millennials. In markets like New York, Los Angeles and Houston, fulfillment centers and millennials overlap. But some markets with fast-growing millennial populations, including Austin, Seattle, Portland, Salt Lake City and New Orleans, have limited regional distribution center capabilities nearby. This can create significant demand for urban warehousing in these locations, as well as significant opportunities for industrial developers.
Deciding to Occupy an Urban Warehouse
Just five years ago, the primary purpose of warehousing was to store product at low cost. Since then, however, Amazon has demonstrated that next-day and even same-day delivery is possible in many markets. In today’s “need-it-now” economy, a primary purpose of warehousing is to reduce delivery lead time — the time from the receipt of the customer’s order to delivery of the product, while keeping overall supply chain costs down. A retailer aiming to ensure customer satisfaction must now carefully consider transportation and inventory carrying costs as well as warehousing costs.
To understand the complex decisions that go into occupying an urban warehouse, one first must understand what goes into overall supply chain decision making. Brad Bossence, vice president of LeanCor and a professional education instructor at Georgia Tech’s Supply Chain & Logistics Institute, offers some insights into supply chain costs and how urban warehouses can lower costs while getting products to consumers more quickly. Bossence notes that many companies are learning to embrace a “total cost of fulfillment” point of view.
“A true ‘end-to-end’ perspective is necessary when making warehouse location decisions,” Bossence insists. “Typical supply chain network modeling should look at the ideal locations and numbers of warehouses as well as their size, stock-keeping unit (SKU) strategy — what inventory and how much of it is stored where — etc. Transportation costs are only part of the total picture, and transportation strategy should enable speed to market and the ideal level of inventory on hand.”
For more detail, read the full version of this article in NAIOP’s Development Magazine.