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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

Third Quarter 2014 Market Reviews

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