The growing popularity of E-commerce is increasing competition for prime space for warehouses and distribution centers close to major urban markets.
According to a report issued by JLL, a Chicago based commercial real estate brokerage, a growing number of retailers — both online and real world — currently are seeking to expand their ability to respond quickly to E-commerce demand. Being close to major transport hubs gives retailers an advantage in speed, cycle time, and order fulfillment and delivery.
The problem, however, is that there is only a limited amount of suitable space. And while construction of new facilities is on the rise, current capacity is bigger than available properties.
This, in turn, is causing rents to increase as companies compete for existing warehouse and DC space.
E-Commerce Requiring More Space
Right now, about 30% of all warehouse space is dedicated to E-commerce, according to Kris Bjorson, JLL’s international director. And as retailers look for faster ways to get their products to customers, that figure is expected to rise even further.
In the third quarter of 2014, vacancy rate for industrial properties was just 7.2 percent, down from 11 percent from the previous year. The vacancy rate for the entire year could end up being as low as 6%, which is unheard of in the real estate market.
Add to that the fact that rents have increased an average of 4.4% in the previous year, and the result essentially is a bidding war for existing warehouse space, according to Mark Richards, of Associated Warehouses.
“We had a period where people were consolidating and rationalizing their networks,” said Richards. “Now, because of the pressure of instant gratification, retailers are starting to hold more inventory which means more warehouses.”
Three Waves of Warehouse Expansion
According to Bjorson, the expansion of warehouse and distribution networks developed in waves. The first wave consisted of E-commerce giants like Amazon building gigantic warehouses of up to 1.5 million feet in states that didn’t charge sales tax, such as Oregon and Montana. The country’s three other states with no sales tax — Montana, New Hampshire and Alaska — are too far from major population centers to be a factor, at least for now.
The second wave — which is happening right now — is about building large omni-channel warehouses near major cities that have major ground transportation service centers.
“The third wave will be about reaching customers in second tier markets,” Bjorson said. “Buildings 500,000 to 750,000 square feet near transportation providers.”
Looking for Cities with More Capacity
In major metropolitan areas such as New York and Chicago, warehouse capacity is reaching its limits. So retailers are beginning to look at second-tier metro areas like Atlanta and Charlotte, where developers are building warehouses before they even signed any tenants.
In Atlanta, for example, industrial commercial construction is up 104% just since last October, according to Dain Fedora, JLL’s research manager.
Craig Meyer, president of JLL’s industrial group, said he expects these trends to continue.
“Over time, we are going to see continuing development and deployment of hyper-efficient warehouses and distribution space in the secondary market,” Myer told Modern Materials Handling. “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.”
“We’re seeing a lot of investment activity in the Southeast where leasing market fundamentals are tightening,” Fedora said. “Speculative construction is making a comeback.”