July 08, 2016
No surprise that during NAIOP’s I.Con national conference, there was significant discussion about e-commerce’s impact on the industrial and retail markets nationally. E-commerce has been the fastest-growing segment of retail as its percentage of overall sales continues to rise. Today, more than half of all leased space greater than 250,000 square feet is occupied by e-commerce tenants and demand shows no signs of subsiding. Due to record-low vacancies in some markets, it is projected that e-commerce growth will require 160 new logistics centers comprising approximately 800,000 square feet each to be built in the top urban markets, in addition to the redevelopment of smaller facilities to support local delivery – known as the “last mile” of the supply chain.
That’s a tall order, and one that makes real estate developers and investors excited. But don’t forget that once these facilities are built and leased, companies need the labor to support them. And this seems to be where the discussions take a more concerned tone. Transportation and labor are the two areas that have seen the largest costs increases in the industrial sector due to its tremendous growth, and workforce shortages could be an impediment to the booming e-commerce industry. So far, users have conceded to paying higher rents in premier locations. The benefits are twofold: the shorter distance from product origin to the consumer results in lower transportation costs, and labor is easier to secure.
Where, though, is the tipping point, and how do companies evaluate these scenarios? For some retailers swept up in the e-commerce race, cost/benefit analyses of supply chain decisions may become more challenging as “ideal” locations are harder to come by, especially in constrained markets. Amazon is so far ahead, how much omni-channeling will other retailers do? How much can they invest if they don’t have a robust supply chain set up, and is it worth it to play catch-up? How much pressure will they put on their 3PLs, and at what expense? Some major retailers may ultimately partner with Amazon due to the enormous cost and risk in investing in their own infrastructure. These are real operational issues for retailers to consider as they make decisions about their industrial property. The winners will no doubt be the companies who can best solve these issues first. Because we know from experience that consumers typically aren’t very patient while retailers figure these things out.