E-Commerce Logistics Impact Industrial Property Loans
The evolution of retail logistics is cultivating a new industrial landscape.
“With the explosion in popularity of e-commerce, logistics models have shifted from hub-and-spoke organization to a product-to-consumer model,” says Casey Martin, commercial real estate commercial loan underwriter with Chicago-based Alliant Credit Union.
The traditional hub-and-spoke distribution model features a central warehouse supporting a few large distribution centers, allowing product to move within a day’s drive from facility to facility to storefronts.
Product-to-consumer models seek to satisfy purchasers that expect one- or two-day shipping, which has become the norm with many online retailers. This expectation is driving retailers to seek non-traditional properties that are close to high-demand consumers to serve as distribution facilities.
The old real estate adage “location, location, location” takes on new meaning with each evolution of the retail industry. Retailers are utilizing smaller in-fill industrial properties in land-constrained markets in an effort to meet consumers’ increasing demands for faster delivery, notes Martin.
He adds that older facilities or properties with atypical warehousing clear heights are of interest to smaller retailers who want their products to be closer to consumers.
Retailers Compete on Delivery Guarantees
The Federal Reserve Economic Data shows that the inventories-to-sales ratio of total business in the United States has dropped from 1.48 in January 2009 to 1.34 in September 2018. This data shows a shift in warehousing trends across the country.
However, this statistic obscures the fact that smaller retailers often have to increase their inventory in order to stay competitive in the marketplace. Amazon’s guaranteed delivery dates are a prime factor.
Martin explains: “Mom-and-pop stores that have inventory on Amazon are required to meet the company’s shipping requirements, resulting in retailers increasing in-stock inventory and either paying to warehouse product at Amazon’s distribution facilities or buying or leasing smaller distribution spaces close to consumers to meet delivery guarantees.”
Logistics Drive Value
This logistics shift is driving up values for properties that have historically been overlooked as warehouse and distribution facilities. Retailers are actively looking for facilities located closer to consumers in an effort to reduce shipping times as well as overhead related to having larger distributors (like Amazon) warehouse and fulfill orders.
Properties located near UPS, FedEx, USPS and other shipping facilities are also experiencing increases in value, as close proximity to package delivery services shortens the overall logistics schedule.
Effects on Lending
Of course, increasing values attract more investors. Institutions are investing so much capital in industrial real estate that it’s a challenge to find lending for non-institutional investors, Martin says. And industrial lending continues to become more competitive as it transitions to a more institutionalized marketplace.
“Institutions typically acquire properties without outside equity or funding and then secure refinancing debt post-acquisition,” Martin notes. “This type of purchasing typically prices out smaller companies and investors.”
Meanwhile, retailers increasingly focus on their largest consumer base and how improved proximity to those buyers may be profitable for the company. For some, this consideration trumps the need for traditional industrial properties — which adds a certain challenge to financing.
To close a successful loan package, both the borrower and the lending institution need to understand the benefits of non-traditional industrial and warehousing properties.
“At Alliant, we’re aware of this trend and the renewed focus on location,” says Martin. “Focusing on the holistic value of a financial package allows us to consider less traditional industrial properties that offer predictable cash flow for the borrower.”