What is in this article?:
- E-Commerce Drives the Demand for Logistics Real Estate
- No Vacancy
With consumers demanding more deliveries at a faster speed, urban locations are becoming the next hotspot for logistics.
There was a time when an abandoned school building in the neighborhood ended up being converted to an art gallery. These days there's a better chance that a retail distribution center run by the likes of Amazon, Walmart or Home Depot will be the new neighbor.
The highest value of urban industrial property has changed as a result of the altered pattern of consumer purchasing. E-commerce is increasingly becoming a preferred channel for how we buy our products. In 2015 total e-commerce sales were estimated at $341.7 billion, an increase of 14.6% from 2014, according to the U.S. Department of Commerce. Projections are for this figure to more than double by 2019.
With this convenient method of purchase comes the expectation of high-speed delivery—next-day in many cases and even two-hour delivery in some cases. This new consumer model is based on what's been called the "Amazon effect," after the online retail giant that created this model and is still the dominant player, accounting for almost 26% of all U.S. e-commerce sales.
To hit the desired delivery times, DCs need to be where the customers are, and there's been a definite shift to urban areas in recent years. Looking at one particular group of consumers—Millennials—the number of college-educated people aged 25 to 34 living within three miles of city centers has surged 37% since 2000.
"Today there is robust demand from e-commerce and third party logistics companies for warehouse and distribution space in urban areas, which includes smaller in-fill locations within major metro areas," explains John Morris, executive managing director, with Cushman & Wakefield, a global real estate services firm "This trend is reshaping the industrial market and driving up costs for urban locations, which can now reach $50 per square foot."
That real estate includes abandoned schools and government buildings which can be retrofitted as distribution centers. Areas are being rezoned for this higher and better use, and the private sector is quickly picking up these properties.
About 10% of industrial leasing and 30% to 40% of total industrial development are now tied directly to e-commerce fulfillment activity, according to research compiled by Ben Cornwall, a managing director at Cushman Wakefield.
Staking a Claim to the Last Mile
What Amazon and other retailers (both Target and Home Depot's online sales are growing 40%-50% per year) are after is the last mile delivery. This portion of the supply chain can eat up to 28% of the total cost to move goods and faces logistics challenges due to congestion.
But Amazon is out in front in this race and already has 25 DCs within large urban centers, with more opening seemingly every month. What's more, Amazon is putting further pressure on land use with its new service called Prime Now. Moving into hyper-speed territory the service promises customers they'll be able to receive "thousands of items" within a two-hour window of clicking the little yellow "checkout" button on their phones. Twenty-five major cities are already being serviced by the program.
Another innovator in the field is Peapod, which is a virtual grocery store that is operating small warehouses, ranging in size from 5,000-8,000 square feet. Peapod cross-docks shipments in its parking lot, which greatly reduces the need for infrastructure and real estate.