LONG BEACH — Demand for warehouse and distribution space is growing faster in high-cost port cities and major inland hubs than in secondary markets, despite accelerating rents, labor and land costs.
“If that’s where the demand is, that’s where I want to be. Yields will be higher,” Chris Caton, senior vice president of research at Prologis, told the 18th annual TPM conference in Long Beach on March 6.
Seaport locations like Los Angeles-Long Beach and New York-New Jersey and inland hubs like Chicago and Dallas are experiencing especially rapid demand for industrial development, due to a convergence of traditional import distribution activities and last-mile e-commerce fulfillment. Vacancy rates are low, rents are increasing steadily and a shortage of warehouse workers and truck driversare pushing labor costs higher at a faster pace than in secondary inland population centers. As a result, US industrial rents increased 9 percent last year, but rents increased 15 percent in the “close-in” locations.
Indeed, an analysis of 13 major seaport industrial real estate markets by Cushman & Wakefield found that in the fourth quarter of 2017, the seaport locations accounted for 28 percent of net absorption. The average vacancy rate was 3.5 percent, compared to 5.1 percent for the US market as a whole. Industrial real estate rental rates can be tracked on the JOC Shipping & Logistics Pricing Hub, which shows that rents in Los Angeles have risen 6.7 percent from the fourth quarter of 2016 to $9.60, while rents in northern New Jersey are up 11.5 percent to $8.14 per square foot.
One important reason why proximity to both distribution hubs and population centers are more important than real estate prices is the increasing cost of transportation, said Michael Murphy, chief development officer at CenterPoint Properties. Transportation costs until recently were 10 times the cost of real estate, but now it is more like 13 to 14 percent, he said.
Increasing drayage costs and worsening driver shortages since the roll-out of the federal electronic logging device (ELD) mandate in December are forcing transportation prices higher. Enforcement of the ELD requirement beginning next month is expected to accelerate this trend because drivers will no longer be able to adjust their log books to make it appear that they are adhering to federal hours of service requirements. With an aging driver force and the difficulty drayage companies are having attracting young drivers, the ability of warehouse operators to ensure access to sufficient truck capacity is more valuable than ever, Murphy said.
Rapid growth in e-commerce sales, which translates to a requirement to locate last-mile delivery facilities closer to large consuming populations, are rapidly absorbing the supply of available industrial space in large port cities and inland rail transportation hubs. “Everyone wants speed. They are constantly rethinking their locations,” said Adam Mullen, senior managing director, Americas leader, at CBRE. Retail sales at brick-and-mortar stores increased 2 percent last year, while e-commerce sales increased 15 percent.
Migration to cities forces DCs/warehouses to move…closer to cities
The e-commerce trend is part of a larger migration to cities, a trend that is accelerating because the population seeks access to the urban experience. “It’s all the things that make city life what it is,” Caton said. As both traditional and e-commerce retailers focus on bringing their products closer to consumers, they are experimenting with different ways to make delivery of products more efficient. “They’re still experimenting. There are eight different ways it can work,” he said.
Creativity in the siting of mixed-use distribution warehouses is especially evident today with the three-story facility ProLogis is constructing at the Port of Seattle and the logistics hub CenterPoint is developing at the Port of Oakland.
Prologis last April broke ground on the first multi-story distribution facility in the US, a 590,000-square foot, three-story warehouse and distribution center two miles from the Port of Seattle. While Prologis has built multi-story warehouses for 20 years in Japan, where developable land in urban areas is especially tight, the Seattle project is revolutionary for the US, and if successful, it could be duplicated in other large urban areas where land is at a premium.
Caton said that even though port-adjacent property is more-costly than land in distant locations, the emphasis of the future tenant or tenants will be will be not on moving high-cost merchandise, but rather on attracting high-volume business. Due to its location at the port, the Seattle facility can potentially serve both as an import distribution center and as a last-mile fulfillment warehouse for the urban area.
The 440,000 square-foot facility CenterPoint is developing adjacent to container terminals at the Port of Oakland will be the first structure to be built as part of the Seaport Logistics Complex on the former 180-acre Oakland Army Base. “It’s a beautiful location,” Murphy said. “The location gives options for international, transloading and last-mile, the ability to serve different pieces of the supply chain,” he said.
The evolution underway in the development of warehouses and distribution centers will help to sustain the momentum that industrial real estate has experienced since the end of the 2008-09 economic recession, a period marked by 31 consecutive quarters of positive net absorption and 25 consecutive quarters of rent growth. “All of us are trying to figure out this evolution,” Mullen said. The rapid changes underway the past five years could accelerate at twice the pace in the next five years, he said.
Mullen predicted that 2018 will see a continuation of the low vacancy rates, rising rents and robust development of recent years. Developers, landlords and users will move forward with a sense of urgency. “No one in this room is getting more patient. They are getting less patient,” he said.
Contact Bill Mongelluzzo at email@example.com and follow him on Twitter: @billmongelluzzo