Last year, e-commerce brought in close to a half a trillion dollars, growing by over 10% from year-to-year. In order to meet that demand and the projected 10% increase over this year, retailers will need to acquire at least 50 million more square feet of industrial warehouse space.
Recently, it hasn’t been the Class A industrial buildings attracting all of the attention. It’s secondary assets from Class B all the way down to Class D buildings, as long as they are close to the city, attracting all of the attention. As e-commerce and global trade continue to strengthen the warehouse and industrial landscape, here are 4 reasons to watch warehousing and industrial spaces:
#1: The Last Mile
Critical to the success of any online operation these days is a distribution network that includes warehouse space within five miles of a city center. The last mile is one of the hardest links in the logistics chain to overcome precisely because of the added road congestion in the cities.
Having a warehouse that is near the city limits allows big trucks to avoid delays caused by city traffic. Smaller third party delivery vehicles are then used to distribute goods to businesses within the city. While Class B products are seeing rent increases just above 10%, industrial rents are steady at around 6.5%.
#2: Limited Supply
Industrial has been outpacing most other sectors including multifamily, office, and retail. Now that supply has vanished, getting in on the remaining few assets is proving to be quite expensive.
Take LA for example. E-commerce sales account for more than 10% of all retail sales in LA and surrounding areas. Yet vacancy rates are at 1%, and the last mile vacancy rate in San Francisco is at 0.2%. With a huge 50 – 60 million square foot gap to fill in order to accommodate e-commerce sales increases for 2018, keep an eye on warehouse and industrial space rent increases.
#3: Repurposing the Big Box
One of the reasons why there is a limited supply of Class B and C products today is because of the innovative repurposing of old, unused industrial spaces and shuttering big box stores. There are as many investors looking to turn old warehouses and industrial centers into multifamily or retail space as there are retailers looking to turn them into links in their distribution chains.
Big box stores like Walmart that continue to thrive are using their advantage of proximity to city centers to serve as both the chain’s own last mile distribution hub and also retail store. According to one estimate, a whopping 70% of Americans live only five miles away from the nearest Walmart, giving that retailer a huge advantage in their distribution network. With some estimating that by 2030 half of all malls in the U.S. will be closed, watch for the hybrid distribution/fulfillment center plus store trend to grow in retail.
#4: Shrinking Warehouses
Lastly, the overall design of warehouse and industrial space is changing. In fact, smaller assets are becoming the new darlings of investors in the industrial sector. Shallow bay buildings with high clearances, multi-story warehouses, and technology infused industrial spaces are part of the changes to watch this year.