E-commerce demand drives unlikely distribution spots

E-commerce demand drives unlikely distribution spots

Warehouse sites in Metro New York/New Jersey area.

With consumers demanding ever faster delivery times, shippers are looking for space that helps them meet that demand, including nontraditional warehouse space. (Above: Warehouse/distribution sites in the New York metropolitan area.) Photo credit: Shutterstock.com.

Fierce demand for warehouse space from which to make last-mile/last-touch e-commerce deliveries, and a chronic supply shortage, have prompted shippers to consider a range of unorthodox options, including converted garage space, residential and retail properties, and multistory warehouses.  

With e-commerce sales expected to double over the next 10 years, and consumers demanding ever faster delivery times, shippers are looking for space that helps them meet that demand and overcome a range of factors that hinder the swift delivery of goods or the availability of space, according to JLL's Urban infill: the route to delivery solution report, released Tuesday. The factors include traffic congestion that slows deliveries, municipal restrictions on logistical operations, and the fact that real estate in densely populated areas can command higher rents for uses such as multifamily buildings and office space than if the same space were used for warehouses, the report says.

The shift toward shippers accepting space formerly not considered usable is a reflection of the dynamics that have in recent years helped squeeze supply chain and logistics companies serving ports in urban areas. The dynamic has forced warehouse rental rates up and vacancy rates down as logistics companies increasingly vie for the same warehouse space as e-commerce companies looking to serve the urban population.

Commercial vacancy rates plunge

Deliveries of industrial properties reached record levels during the first nine months of 2018, but demand from retailers, third-party logistics providers (3PLs), and manufacturers was so strong in both primary and secondary markets that vacancy rates held at historically low levels of 4.9 percent, Cushman & Wakefield reported in its third-quarter ‘US Industrial MarketBeat’ report. Asking rents for distribution space increased almost 6 percent to an average of $6.15 per square foot, according to the report.

The current growth cycle began in the coastal gateways such as Los Angeles-Long Beach and New York-New Jersey, as well as inland hubs such as Chicago, Dallas-Fort Worth, and Atlanta. But secondary markets including Louisville, Indianapolis, Cincinnati, Charleston, and Nashville are now growing faster percentage-wise than the primary markets.

Although a strategically placed network of regional distribution centers countrywide is still important, the need to provide fast, efficient last-mile/last-touch service is reshaping the perception of what is acceptable space, the JLL report says.

Goal — get closer to the customer

“Same-day delivery expectations have forced many companies to consider a number of different urban infill options in order to reach consumers in and around major US cities,” according to the report.

“In this competitive retail environment, getting closer to the customer may mean leasing space in older, less functional warehouses that do not have all the features or automation of a large, modern regional distribution facility, though they are well located for a contingent of prime consumers,” the report says.  

One such infill project is the conversion of an underutilized parking deck in downtown Chicago into a last-mile/last-touch distribution center. In New York City, Seattle and the San Francisco Bay Area, the shortage of space has promoted shippers to use multistory warehouses, which are prevalent abroad but until recently were seen as too inefficient in the US, the report said.

The use of unorthodox space has prompted rental rates for urban infill space to grow faster — by about 5.5 percent in the last 12 months — than rates for all warehouse and distribution space, which grew by about 5 percent over the same period. Until mid-2017, rates for all warehouse and distribution space had been growing faster than rates for infill space.

Contact Hugh R. Morley at hugh.morley@ihsmarkit.com and follow him on Twitter: @HughRMorley1.