Goldfish, e-Commerce and what will matter to most tenants

By Adam Roth CCIM, SIOR, executive vice president, NAI Hiffman; Director- NAI Global Logistics

There is no denying how impactful recent technology has been on our daily lives, our purchasing decisions and our expectations. Seventy-four percent of consumers will wait 5 seconds for a web page to load on their mobile device before abandoning the site. Forty-six percent of consumers are unlikely to return to a mobile site if it didn’t work properly during their last visit. The average attention span of a consumer is 7 seconds, a goldfish is 9.

These technological influences and expectations are forcing corporations to make changes to their supply chain which has had a profound impact on the industrial real estate sector; an example is how UPS is positioning for the upcoming holiday season. Nearly three-quarters of all annualized e-commerce now occurs during the holiday season. For the first time in its 107-year history, the company will operate a full U.S. air and ground pickup, delivery and sorting network on the day after Thanksgiving. In addition, they will be adding 900 staging positions to its Louisville hub, which will remain in place after peak season. UPS has also built “mobile distribution center villages” (aka “pop-up” Distribution Centers “DC’s”) that will function across its U.S. network. The plan is to reposition these mobile DC’s to provide additional capacity as e-commerce demand warrants.

The “pop-up” approach UPS has taken to DC’s is unique, however servicing e-commerce as well as various distribution channels is a common issue. Forty-nine percent of distribution companies consider it a top-priority to respond to the challenges of multi-channel distribution. In addition, with duplicate inventories and software systems being costly, a growing number of companies are opting for a single inventory in a single facility, serving orders coming in multiple channels versus multiple facilities servicing varying channels for one region.

Another challenge to e-commerce has been speed of delivery but not the same-day delivery that we hear so much about. According to National Association of Industrial and Office Professionals (NAIOP), when e-commerce retailers were asked if they were chasing same-day delivery, the answer was a resounding “no.” Research conducted by online electronics retailer Newegg indicated that fewer than ten percent of customers are interested in same-day delivery, a very small segment of the market.

Nonetheless, speed of delivery drives revenue which will lead to more fulfillment centers in highly populated areas. The battleground for e-commerce is now transportation, specifically in regards to speed and cost. On average, transportation costs have been 8-10 times the cost of real estate and in most scenarios, transportation is the true “driver” behind real estate decisions. This will soon escalate and transportation will become 12-15 times the cost of real estate largely as a result of restricted capacity.

The Council of Supply Chain Management Professionals (CSCMP) Annual State of Logistics Report states that capacity is growing more constrained each year and the capacity issue is the number one concern of trucking executives as well as a top priority for other industry leaders. At the end of 2013, trucking bankruptcies increased for seven consecutive quarters and were at a three-year high. Approximately 21,775 trucks were pulled off the road due to company shutdowns, which is larger than in 2010 and 2011 combined. With the capacity loss in real vehicles, as well as the lowered productivity of current assets due to regulatory changes in Hours of Service Rules and CSA 2010, carriers will be raising rates significantly in 2014, probably in the 5% to 8% range. It’s no surprise that the two fastest growing 3PL market segments are domestic transportation management and dedicated contract carriage.

Freight is a great economic barometer and in the first five months of 2014, freight performance was the strongest since the end of the Great Recession. At year-end, it will likely be the best freight year experienced in the last eight. The pressure on actual rent will further reduce in comparison to the importance of location and building site design. Tenants will require facilities that allow them to better adapt to the pressures on trucking and capacity. In addition to larger trailer yards and maximum dock capacity, companies will more often have an e-commerce/ fulfillment component as part of their distribution operation. This will command additional car stalls beyond the standard that our industry has been accustomed. With less pressure on actual rental rates and more emphasis on the facility design, Tenant’s requiring over 300,000 SF will more often require over 300 car stalls.

More importantly for developers, the Tenants will pay a premium for this type of building. When looking at the existing industrial inventory, this type of facility is a rare product. For owners, now is the time to position your assets for a fulfillment component to secure tenants. It’s no longer whoever has access to capacity wins; very soon whoever has access to capacity and can work with the trucking sector survives.

Adam D. Roth, CCIM, SIOR is an executive vice president at NAI Hiffman and specializes in industrial real estate including land assemblage and development, building sales and tenant representation. Additionally, as a director of NAI Global Logistics, Roth’s focus is providing real estate and supply chain solutions to distribution and warehouse companies throughout the world on matters including corporate relocation, site search analysis, build-to-suit alternatives, acquisition, and disposition and leasing services. 

Source: RE Journals

Event: Bisnow's 3rd Annual State of the Suburbs

On Thursday, October 2nd, Bisnow hosted its 3rd annual State of the Suburbs event at The Westin Lombard Yorktown Center, covering the state of the suburban office market, investment trends in the marketplace, and the outlook for the Chicago suburban office market.

Panelists included:
Christopher Carroll – Managing Director, HFF (moderator)
Matthew Haley – Managing Director, Pearlmark Real Estate Partners
Tim Junker – Principal, Walton Street Capital
Richard Blum – Managing Principal, White Oak Realty Partners
Michael J Rolfs – Partner, Hamilton Partners
Paul Tsakiris – President & Managing Broker, First Western Properties

Carroll – What’s attracting investors to the suburbs? 

Rolfs – I think value is the main factor. People are seeing that there is positive absorption in the suburbs and they are realizing that momentum is picking up, and that there is a better yield. 

Blum – The arbitrage in yields between downtown and the suburbs are huge, and the spread is widening. I think some are finding it easier than others, but it is all being driven by yield. For every ten investors for a downtown office building there’s only one or two for a suburban building. It is still a relatively thin market.

Junker – In addition to yield, we are seeing the credit quality of the tenants as an important factor. We are encouraged to see institutional names that have been around for decades and have very strong balance sheets that are looking to make long-term commitments. 

Read the full recap and summary here.

Third Quarter 2014 Market Peek

NAI Hiffman is pleased to present its Third Quarter 2014 Market Peek, a first look at the market statistics for the Chicago Metropolitan office and industrial real estate markets.

More Than 15 million SF Under Construction in Industrial Market

The industrial market witnessed its 17th consecutive quarter of improving conditions during the third quarter. 1.8 million SF of vacant space was absorbed between July and September, bringing the tally for the first three quarters of the year to 8.4 million SF absorbed.
Despite continued absorption, the overall industrial vacancy rate was unchanged at 8.1% due to the delivery of unleased new speculative buildings and demolition of several buildings throughout the market.
Construction activity continues to accelerate, with more than 15 million SF currently underway, the most activity we have seen in more than 6 years. 46%, or about 7 million SF, of those construction projects are being built on a speculative basis with no tenant in place. The remainder are build-to-suit projects.

Suburban and Downtown Office Market Vacancy Rates Improve

During the third quarter of 2014, Chicago's suburban office market absorbed more vacant space than the downtown market for the fourth consecutive quarter.  

Between July and September, net absorption totaled 245,000 SF in the suburbs compared to 116,000 SF in the downtown office market. However, the downtown vacancy rate improved by 29 basis points to 12% by the end of the third quarter, while the suburban vacancy rate improved by only 19 basis points to 18.9% in the same time period. 
More than 3.7 million SF of new construction is underway, including a 53-story, 1.2-million SF office tower at 150 N Riverside Drive in Chicago breaking ground during the third quarter.  

For further information regarding the content of this market peek, please contact:

Craig Hurvitz | Director of Statistics and Market Information
630 693 0645

If you are interested in attending a custom market overview presentation, please contact:
John Picchiotti | Chief Operating Officer, Brokerage
630 691 0608

Mentioned by RE Journals

Adam Johnson represents seller in St. Charles office condominium sale

NAI Hiffman represented PB II OREO, LLC in the sale of two office condominiums totaling 8,238 square feet at 3310 West Main Street in St. Charles, Illinois. The buyer, Trustee for Landrus Realty 401K Plan & Pension Fund, purchased the suites as an investment. The property features a quality brick and stone veneer exterior, dramatic atrium, signage along Route 64 and Peck Road, and is less than 3 miles from Delnor Community Hospital. 
Adam Johnson, vice president with NAI Hiffman’s office services group, represented PB II OREO, LLC in the transaction. Jake Finley of Conlon Commercial represented the buyer.

Mentioned in the Daily Herald Business Ledger
Mentioned by RE Journals
Mentioned by RE Business Online

NAI Global's Economic Briefing with Dr. Peter Linneman

Where are the opportunities for growth? Which markets are hot, solid, and weak? Watch NAI Global's Economic Briefing from Tuesday, September 16th here as Dr. Linneman addresses several topics including: 

  • Where will MSA population grow most and least by 2020 and 2030?
  • Where are real values, rents, and construction levels compared to historical averages?
  • Where will cap rates go for each sector?
  • What happens when rates rise?
  • When will vacancy rates really decline?
  • Housing market update
  • Real estate capital market update