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Shrinking Delivery Times Benefit Warehousing

trtttThe growth of ecommerce is driving an upsurge in the need for extra warehousing space in the retail industry, according tocommercial real estate company Jones Lang LaSalle.

Black Friday sales dropped 11% last year, the National Retail Federation reported. However, Cyber Monday sales, grew 8.5% and according to IBM Corp.’s Digital Analytics recent Benchmark report, online sales grew 13.9% from Nov. 1 to Dec. 31 compared with 2013’s holiday season.

Online retailers face a slew of challenges, notes Joanne Bestall, JLL Vice President of Public Relations, Americas. “Price competition online is brutal, for instance. And delivery times keep shrinking, raising consumer expectations – and expanding the challenges for retailers.”

One result of ever-compressing delivery times is that retailers are building more warehouses than almost ever before. Kris Bjorson, International Director at JLL, pointed out that 30% of all warehouse space today is in some way related to ecommerce. That is elevating the need for warehouse space, which has recovered from the wake of the prior recession and is posting solid gains, Bestall said.

JLL’s third quarter 2014 North America Industrial Outlook found the vacancy rate for industrial properties was 7.2%, down 3.8% from last year.

When the numbers for the full year are out, vacancy rates could be as low as 6%, Bestall pointed out. She also observed that the tighter market has driven rents up 4.4% from a year ago.

A new Distribution Trend is emerging for Warehousing

The way Bjorson sees it, the retail/ecommerce distribution market has developed in waves. The first wave was focused on ecommerce companies building big warehouses (up to 1.5 million square feet) in states that didn’t charge sales tax.

He said the second wave – which is occurring now – is about spreading those large omni-channel warehouses to locations that are within no more than 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,” Bjorson predicts. “Buildings 500,000 to 750,000 square feet near transportation providers.”

Because cap rates in tier-one cities are shrinking, Bestall said 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% from earlier in 2014, 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,” said Dain Fedora, research manager Americas Industrial at JLL. “Speculative construction is making comeback.”

Bjorson believes the fourth wave will be smaller local depots close to cities for same-day delivery.

But questions like how many warehouses and how close to cities are still open, he says. Answers will partly depend on what consumers want. Within the ecommerce world, there’s debate about what kind of goods people really need delivered the next day.

Delivery and Logistics Consumer Expectations on the Rise

For a big company like Amazon, delivery can be a loss leader, Bestall observed. 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,” she said.”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, Bestall pointed out.

She said one problem was that 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,” she said.

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

Bestall concluded: “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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