Over the past decade, the way we shop has undoubtedly changed. With the evolution of e-commerce, subsequently, so has industrial real estate.
Increasing delivery speeds and near-immediate access to goods have become top priorities for consumers, pushing retailers and their supply chains to follow suit. The demand for warehouse space in close proximity to major highways and transit hubs has steadily increased. These locations allow for faster and more efficient deliveries to the end user.
Andrew Chung, Innovo Property Group
Over the past five years, the industrial real estate sector has experienced healthy growth while other sectors have struggled to maintain demand, further showcasing the correlation of growth to the rise in e-commerce. As online retailers continue to competitively decrease their shipping windows — think Amazon’s and Walmart’s one-day shipping policies — demand for last-mile delivery facilities has risen.
The last mile refers to the final movement of goods from a warehouse or distribution center to a final destination. The need for modernized, last-mile facilities has increased with the requirement to meet consumer demands and increase shipping speeds.
Shifting Expectations
Throughout the last few years, when it comes to shipping and delivery time frames, customer expectations have significantly increased. Ten years ago, it was expected that an online delivery order would take seven to 10 business days and incur a premium shipping charge. Today, in the age of Amazon Prime, customers expect items to be shipped in two days or less for free.
This has put pressure on retailers to get the last mile right, and on the industrial real estate sector to deliver the right facilities, especially in urban markets with limited warehouse inventory.
Warehouse space near densely populated cities allows retailers to ship goods at greater speeds. But warehouse space is hard to come by in urban cores, Plus, today’s warehouses take up a third more space than they did a decade ago and are nearly three times as voluminous as they were pre-2000.
Finding ample warehouse space near major markets such as New York City is extremely difficult with regard to land availability, which is forcing developers to go vertical to maximize the land. Earlier this year, Amazon made headlines when it agreed to lease space at a three-level warehouse in Seattle, the first property of this type in the U.S.
Amazon and other retail giants are looking for facilities that will allow them to slash delivery times and improve efficiency by providing an additional hub closer to large customer bases in densely populated cities.
E-commerce deliveries tripled between 2013 and 2018. To keep up with the demand for shipping products and managing returns, companies are seeking alternative options that may not have been necessary in years past but which are imperative today.
Impulse, Return Orders
As online shopping gets easier for consumers, it leads to impulse purchases — or the ordering of multiple options — especially with retailers making it easy for customers to make returns.
In fact, customers are three times as likely to return a purchase made online than in store, and reverse logistics to manage and process these returns can take up to 20 percent more warehouse space than traditional sales.
While demand for last-mile facilities has continued to expand, according to data from NAIOP, the forecast for new industrial space demand has decreased amid a slowdown in the U.S. economy. Industrial real estate owners and investors should be focusing on the efficiency of the properties in their portfolio, versus the size of the properties.
Final Thoughts
As the market continues to adapt to the evolving e-commerce landscape, typical warehouse space is not going to cut it. Companies today are looking not only at square footage, but also at access to major highways and air transit hubs. Users are also looking for more eco-friendly ways to deliver goods via innovations like solar panels and electric vehicle charging stations.
Nearly a billion square feet of total U.S. warehouse inventory is more than 50 years old and has clear heights of less than 20 feet. Today’s standards require updated features that older builders may not be able to accommodate.
Modern, multi-story warehouses within the urban core are the solution to the evolving e-commerce industry and the spaces behind it. The industrial real estate industry has to adapt to changing consumer needs, as older antiquated buildings cannot offer what is needed in today’s world.
— By Andrew Chung, founder and CEO, Innovo Property Group. This article first appeared in the November-December issue of Northeast Real Estate Business magazine.