At 3,000 feet long and 700 feet wide, Skechers’ new 1.8 million-square-foot distribution center in the eastern end of Southern California’s Inland Empire is big enough to contain 40 football fields. Sitting on more than 200 acres, the building with 270 truck bays has 800 miles of steel rebar, 700 miles of electrical wiring and 14 miles of water sprinkler pipes.
The construction of the nation’s largest industrial DC is a strong signal the downturn that took industrial real estate vacancy rates to a 10.9 percent peak nationally in the first quarter of 2010 is over, with vacancy rates falling to 9.7 percent in the third quarter, according to global real estate firm Grubb & Ellis.
But the radical changes wrought by stubborn economic woes, rising fuel costs and volatile consumer demand are just beginning and will evolve as retailers and manufacturers seek new efficiencies in their supply chains and distribution networks.
Many, like Skechers, are consolidating multiple warehouses into big-box distribution centers and employing automation and advanced technologies, including robotics, ASRS (advanced storage and retrieval systems), smart conveyors and voice activation systems to gain the efficiencies and economies of scale that such facilities are capable of providing.
The trend to bigger, more efficient DCs, driven in part by the growth of online retailing, has resulted in a shortage of Class A distribution centers of 400,000 square feet or more in the nation’s logistics hubs. It’s driving demand for new construction of big-box DCs, one of the few bright spots in a recession-battered U.S. warehousing market that only recently has started to recover.
Skechers, the nation’s second-largest footwear company, isn’t alone. Appliance giant Whirlpool last year announced plans to consolidate more than 40 older warehouses into 10 national distribution centers, including a 1 million-square-foot DC in Wilmer, Texas, near Dallas.
Online retail giant Amazon.com previously announced plans to open a 1.2 million-square-foot fulfillment center in Phoenix and a 900,000-square-foot facility in Indianapolis.
And in March, Hewlett-Packard consolidated a number of facilities by leasing a 1.4 million-square-foot facility in San Bernardino, in California’s Inland Empire. At the time, it was the nation’s largest leasing deal since the start of the recession in 2008.
That record lasted all of a few months until Skechers unleashed its half-mile-long-plus mega-DC in Moreno Valley that is set to open by year-end.
The deals are part of a consolidation trend in retail distribution made possible by evolving technologies that drive new levels of automation and efficiency in warehouse operations, said Darla Longo, vice chairwoman at global real estate services firm CB Richard Ellis. Longo acted as broker for the Skechers deal with project developer Highland Fairview and brokered the facilities Skechers is vacating.
By consolidating, Skechers expects to save more than $10 million annually in operating expenses through more efficient use of energy, reduced labor costs and other economies of scale. It also enables the company to “get out of the trucking business” by not having to move goods between warehouses.
“The Skechers facility and others like it are exponentially more efficient than other types of warehouses,” Longo said.
The overall U.S. warehousing market is improving, but major logistics hubs such as the Inland Empire, Chicago, Dallas and New Jersey are well ahead of the pack, said Jim Costello, principal with CB Richard Ellis Econometric Advisors, the research and data arm of CB Richard Ellis.
That’s where most big-box DCs are located and is consistent with strong and growing demand for such facilities, which far outpaces overall market demand. The 85 properties of 1 million square feet or more that were built in the U.S. since 2000 have a collective availability rate of 8.5 percent, while the overall national industrial warehousing availability rate is around 13.7 percent.
The availability rate for the 85 big-box DCs is down from a high of 14.4 percent in the second quarter of 2009. Sixteen of the properties are in the Inland Empire; nine are in Chicago; eight are in Dallas; seven are in Atlanta; there are six in New Jersey and Memphis; and five in Columbus, Ohio, and St. Louis.
Development of big-box DCs is keeping pace with reduced availability. As of the third quarter, DCs of 400,000 square feet or more accounted for 36.8 percent of all new warehouse construction in the U.S. since 2000, although such facilities make up only 6.2 percent of the nation’s total warehouse inventory.
DCs of 400,000 square feet or more accounted for 96.5 million square feet of new warehouse space added in Riverside, Calif., since 2000, equal to 56.4 percent of the total. In the same period, 61.2 million square feet of new big-box space was added in Chicago, equal to 46.5 percent of the total. In Atlanta, 52 million square feet of new big-box space was added, equal to 47.7 percent of new construction, and 43.6 million square feet of new big box space was added in Dallas, equal to 53 percent of the total.
The trend is even stronger in the nation’s second-tier distribution hubs. In Columbus, the 25.2 million square feet of new big-box space added since 2000 accounted for 66 percent of the city’s new warehouse inventory. In Indianapolis, the figures for the period were 32.2 million square feet, or 73.6 percent of new construction, and for Memphis, 28.8 million square feet, equal to 72.5 percent of new construction.
The giant DCs allow companies to experiment with different fulfillment strategies and respond to the demands of high-turnover online retailing. Online retail sales totaled $176 billion in 2010 and are projected to reach $250 billion by 2014, according to a survey conducted by Forrester Research and Shop.org, a division of the National Retail Federation for online and multichannel retailers.
“With higher product turnover, a few guys pulling pallets around will not cut it anymore,” Costello said.
Even as speculative development and new warehouse construction remain stalled, three buildings of more than 1 million square feet were built in 2010 and three have been built in 2011, an indication of the resiliency of demand for big-box facilities. “At a time when no one can get financing and availability is at an all-time high, it’s a clear sign that the market prefers these to older, less efficient space,” Costello said.
In an interview with the Los Angeles Times, Skechers’ Chief Operating Officer David Weinberg said the company expects huge increases in productivity when the facility opens this year. The company, which has been operating out of six smaller warehouses in Ontario, in Inland Empire West, can currently handle 7,000 pairs of shoes an hour. At the new warehouse, with its efficient design and advanced robotics, Skechers expects to be able to move 18,000 to 20,000 pairs an hour.
The company relies heavily on the Port of Long Beach for inbound shipments. Moreno Valley, in Riverside County, is about 68 miles from Long Beach and was one of the few Inland Empire communities able to provide a site big enough for a 1.8 million-square-foot DC.
The facility is expected to be the largest LEED-certified distribution center in the U.S.
Today’s most advanced distribution facilities share certain characteristics, including clearances of about 35 feet, energy-efficient lighting and building materials, low-flow plumbing and solar collectors, said Bob Silverman, senior vice president of the supply chain and logistics team for global real estate services firm Jones Lang LaSalle. They have a lot more staging area for trailers and higher ratios of dock doors to total square footage.
“The idea is to minimize inventory and maximize throughout,” Silverman said.
Rich Thompson, head of Jones Lang LaSalle’s supply chain and logistics team doesn’t necessarily see a trend to consolidation in U.S. distribution markets. Instead, forward-thinking companies with the resources to do so are rationalizing their networks to prepare for an eventual upturn in the economy. For companies such as Skechers and Whirlpool, that means consolidation. For others, it means adding smaller facilities to be closer to customers and reduce the costs of last-mile delivery.
“The best time to re-evaluate your network is when economic times are tough,” Thompson said. “When times are good, companies can’t sit back and look at infrastructure.”
The growth of direct-to-consumer sales has forced major retailers to consolidate online and store-based fulfillment operations under one roof, adding to demand for high-tech, big-box facilities and the sophisticated software needed to manage them, said Scott Zickert, product marketing manager for Red Prairie, a Waukesha, Wis.-based provider of productivity software. “There are very upfront cost savings in consolidating labor and transportation activities,” he said.
Effective management of automated warehouses requires real-time visibility across extended supply networks, with strong analytics capabilities and configurable reporting to support multiple fulfillment strategies. Red Prairie’s warehouse control systems have scalable integration features that let them function as single interfaces to existing IT infrastructures and automated systems.
Automated fulfillment has taken off in the past five years, driven by the high volume, rapid-fire demands of online retailing. In such high-pressure environments configurability, scalability and ease of use are the key capabilities that retailers need to support changing workflows.
Red Prairie often collaborates with vendors of the latest ASRS and robotics technologies to ensure rapid deployment and full integrative capabilities.
“You always need to make sure that software can deliver solutions with as little development as possible,” Zickert said.
Contact David Biederman at email@example.com.