The industrial real estate sector is currently undergoing one of the greatest expansionary periods in the nation’s history. Record development, all-time high occupancy and rental rates and strong leasing activity have been a boon to the U.S. industrial market in the last two years.
In addition to these fundamental elements that make up a strong sector, there has been a demand driver that has transformed the industrial market more now than ever: e-commerce. Amazon is now the largest industrial occupier post-recession, which is forcing retailers and wholesalers to modernize their supply chain to keep up. E-commerce is not a new phenomenon, but it is becoming increasingly competitive, and is expected to grow another 55 percent in the next four years, according to Colliers International research.
E-commerce has reshaped the way people purchase goods, resulting in new increased requirements on the transportation of products. As such, organizations are needing to reevaluate their supply chain strategies and transportation costs, and demand for smaller fulfillment centers closer to the urban population is exploding.
Katie Lester
Director of Research,
Colliers International
This challenge around the “last-mile delivery” is altering the distribution and logistics sectors. IMS Worldwide defines the last mile as the “last point of distribution or sortation to the final destination at a home or business.” This represents the final leg in the process of transporting goods to the consumer.
Colliers International’s “Strategy for the Last Mile” report indicates that over 50 percent of an organization’s supply chain costs are attributed to transportation. While the initial leg of the transportation of goods is efficient, the stage from the distribution center to the consumer is the most expensive and also inefficient. As customers demand for their e-commerce orders to be filled and delivered within two days or less, organizations have to decide how they will get their products to the end users quickly and efficiently. This can be paying higher prices for industrial space closer to the urban core or choosing a third-party logistics (3PL) company to house goods.
The last mile conundrum is also making waves in Nashville. Third-party logistics companies are pouring into Middle Tennessee, and some companies are locating their own 3PLs to the region. This past year, Lowe’s Cos. Inc. opened its new 1.1 million-square-foot fulfillment center just outside of Nashville, with the ability to deliver product to customers in 75 percent of the country in two days or less.
The high-demand submarkets that 3PLs and companies are choosing include the Industrial Business District and the Southeast submarket, where vacancy for large blocks is minimal, resulting in escalated asking rents. In the urban core where bulk vacancy is currently under 3 percent and asking rates have peaked to the $6 per square foot range, large companies that historically occupy 500,000 square feet are choosing smaller blocks of space that are closer to the urban core. Amazon was one of the high-profile companies that signed a lease and moved into 124,000 square feet at Panattoni’s Skyline Distribution Center close to downtown Nashville. This prime location gives Amazon interstate frontage and favorable access where three interstates converge.
3PLs are also taking over large blocks of existing industrial warehouse space within close proximity of highways that connect to major interstates. An example is Superior Third Party Logistics, which transports Dollar Tree products. This 3PL occupies 237,275 square feet at 245 Couchville Pike in the high-demand Southeast submarket.
As Nashville becomes inundated with 3PLs that are looking to occupy space, one of the issues that may need to be addressed in Middle Tennessee is the shortage of labor in the logistics industry. As the supply and logistics field becomes more complex and grows in size, the need to for labor simultaneously increases. Concurrently, the shift of baby boomer generation to retirement is causing a gap in qualified labor availability. According to a study by Penn State, Penske Logistics and Capgemini, 50 percent of executives surveyed are having issues finding and retaining qualified talent, and supply chain management positions are on track to outpace available, qualified labor at a ratio of six to one in the next few years.
In Nashville, employment has remained over 95 percent since February 2015. On the trade, transportation and utilities side, employment has increased by 11.4 percent in that same time frame, equating to 20,000 jobs. Despite the tightening of the workforce, Nashville has positioned itself as a strong distribution hub that can accommodate increased job growth, as the region boasts 1.83 percent population growth annually. This translates to average 24,218 net migration into Nashville each year, and 66 net in-migration per day on average.
In addition to the population growth, Nashville has also become the home of supply chain giants — including Nissan North America, Bridgestone Americas, Gap, Starbucks Coffee and Amazon. The international brands have significant footprints in Middle Tennessee, and Nashville is especially becoming synonymous with Amazon.
Terry Smith, executive vice president and partner at Colliers International said, “Large companies are becoming a true brand of Nashville. Amazon was one of the few cities in the nation that had two 1 million-square-foot distribution centers at once.”
Nashville is a true distribution hub, and the industrial market is poised for a strong 2019 as the demand for quality location and product continues to simultaneously grow with the increasingly robust e-commerce sector.
By Katie Lester, director of research at Colliers International. This article originally appeared in the February issue of Southeast Real Estate Business.