Over the years, industrial occupiers have typically operated in urban areas separate from residential neighborhoods. But as the availability of industrial-zoned land in urban cores becomes more scarce, industrial occupiers are inevitably moving into parcels of land that previously weren’t well-suited or zoned for industrial property—many of which are in suburban or residential areas. And with the cost of transportation increasing, industrial occupiers more than ever need to locate in areas close to their customer and labor base.
What does this shift mean for logistics, retail and the communities these industrial occupiers locate in?
Goodbye to the ‘Burbs You Used to Know
Industrial property in suburban areas present a number of benefits to the occupiers themselves, as well as the communities where they operate. For example, an e-commerce company that builds a distribution center in a residential, suburban area means that they’ll be logistically closer to their consumers. Final-mile delivery is one of the most costly pieces of logistics for companies, and can account for roughly 53% of shipping and transportation costs. Additionally, according to a 2018 PwC consumer insights survey, 62% of consumers indicated they expect online purchases to be delivered within two days or less. And with e-commerce slated to become the largest segment of retail globally by 2021, locating closer to consumers in suburban America is a win-win for both e-commerce companies and consumers alike.
When choosing a location for development, labor studies are conducted to ensure there is adequate labor available in the area to sustain operations. In addition to being closer to consumers, locating in suburbia means that industrial occupiers would be in closer proximity to their labor pool. With the U.S. unemployment rate currently at a nearly 50-year low, the availability of labor is a major issue for industrial occupiers at the moment. Not only does it mean more labor availability for these companies, but it also means workers will likely be closer to where they work, a bonus for both sides.
While there are certainly major benefits that industrial occupiers enjoy by locating in suburban areas, there are also several challenges that can emerge. Communities are often concerned about factors that could change the dynamics of their neighborhood, such as traffic, parking, work hours, noise pollution, obstructed views and pollution caused by the number of idling trucks.
However, a lot of these challenges will be future non-factors. “All major trucking manufacturers are developing and planning to implement electric trucks in the near term. The technology is really close now. These would be ideal for distribution from ports to distribution centers, where the distance is relatively short and there is some downtime waiting to unload the container. Just think, no more engine idling,” notes Gregory Healy, Colliers’ senior vice president and head of Colliers’ Supply Chain & Logistics Consulting group. “These trucks are quieter, at least 30% more cost effective when compared to internal combustible engines and reduce pollution tremendously as they produce no exhaust in transit and no engine idling. The widespread utilization of electric trucks is not too far in the future.” UPS, for example, is focusing on implementing electric, zero-emission vehicles in their own operations. From 2010-2017, the cost of electric batteries for vehicles dropped by a whopping 80%, and is expected to drop another 50% or more by 2020 or 2025 which should only further promote this technology.
Aside from the vast reduction in battery costs, electric trucks, in comparison to gas or diesel-powered trucks, are also cheaper to operate. Maintenance costs are significantly lower, since electric trucks have fewer moving parts, and they run more efficiently and are more cost-effective to charge in comparison to buying gas or diesel.
There are also perceived cons of industrial occupiers locating near residential areas that might be shifting. In the past, homeowners were often worried that a warehouse in their neighborhood would reduce their home’s property value. But as the fundamental shift in the way consumers buy and receive their products continues to evolve, much like the convenience of having retail stores near a residential neighborhood is perceived as a benefit, having a large distribution center would be equivalent to having a wide variety of stores just a click away—never having to leave your home to receive everything from consumer product goods to one’s groceries. This new paradigm may shift the perception of distribution facilities where they become an asset to the community, and property values.
Where is this Trend Occurring?
Two markets in particular have seen the impact of large distribution centers moving into their markets: the Lehigh Valley in Pennsylvania and the Inland Empire in Southern California. Located in Northeast Pennsylvania, Lehigh Valley consists of a group of ever-expanding communities including Allentown, Bethlehem, Nazareth and Easton. This previously rather rural area has been impacted as big box distribution moves west and as property values, congestion and labor has challenged the Northern New Jersey market.
By moving out to the Lehigh Valley, new construction has been developed as Class A industrial product which can accommodate modern distribution more effectively. Additionally, the location of the Lehigh Valley provides relatively close access to the Port of New Jersey on the inbound side, and quick access to some of the largest cities in the Northeast, including the greater New York market. Colliers’ 10 Emerging U.S. Industrial Markets to Watch in 2019 noted that the area is home to more than 62 million people within 250 miles of this market’s core. As new distribution facilities have moved into this area, there has been a positive impact on employment as well as land values.
On the west coast, Southern California’s Inland Empire has grown to become the largest big-box industrial market in the U.S., comprised of more than 600 million square feet of industrial space. As the greater Los Angeles market has continued to sprawl, over the last 20 years the Inland Empire has been the major recipient of new big box distribution centers, many over 1 million square feet. Close proximity to the Ports of both Long Beach and Los Angeles is an advantage, especially considering that the two ports combined handle more than half of the loaded inbound container volume in the United States. But similar to Northern New Jersey, the availability of new sites has pushed development to the outskirts of the region.
Although much further away than other closer Los Angeles submarkets, the Inland Empire previously had an abundance of affordable land available, which spurred big-box development. Additionally, sitting at the crossroads of major highways and railways, the Inland Empire is oftentimes the first point of entry for many of the consumer goods in the U.S. All of this development has made the Inland Empire, which has historically lagged in job growth, now the leading region in the state for job creation—again, elevating land values. But the sprawl does not seem sustainable, so many companies, although putting up large distribution centers in the Inland Empire, now need to build smaller distribution facilities in other Los Angeles submarkets to provide for cost and speed efficient delivery.
What’s Next for Industrial Occupiers?
What will the future bring for industrial occupiers and where they choose to locate? With the rapid proliferation of e-commerce in conjunction with the shrinking availability of developable land, we will likely see the trend of industrial warehousing commingling in suburban areas continue. “Consumers have already embraced e-commerce, and the investment community is backing e-commerce as well,” adds Healy. “The last part is for communities to understand how this is the future, and that this trend will help bring prosperity and convenience to communities.”
This article was written by the U.S. Colliers Editorial Board, whose mission is to produce new and noteworthy commercial real estate thought leadership pieces to create conversation around proactive content. The Editorial Board focuses on CRE trends in the United States, and is comprised of Colliers marketing, research, communication and service line leaders.