How E-Commerce is Changing the Fortune and Construction of Industrial Buildings

How E-Commerce is Changing the Fortune and Construction of Industrial Buildings

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The explosion of e-commerce has created demand for industrial space that has never been as intense and sustained as it is now, sparking vast amounts of industrial development throughout the U.S. In 2017, 332 million square feet (MSF) of new industrial inventory delivered across the US, and nearly 405 MSF is expected to be delivered by year end 2018.

For the past seven years the US economy has undergone a significant structural shift in how goods and services are purchased and consumed. Instead of brick and mortar stores holding the merchandise until the consumer needs it, goods and services are now increasingly being purchased online. Retail e-commerce sales worldwide are forecast to nearly double between 2016 and 2020. Forty percent of internet users in the United States stated that they purchased items online several times per month, and twenty percent said they bought items or services online on a weekly basis. The effects of the e-commerce revolution have been substantial and wide ranging: from changing the structure and composition of the US labor market to changing the character of warehouse operations and requirements. E-commerce operations usually have higher employee counts—typically, two to three times more than traditional warehousing—and greater automation compared to typical distribution centers. Accordingly, modern warehouses require more parking, cross-docks, higher clear heights, and greater power demands than traditional warehouses. From a holistic perspective, regional and national companies are demanding their facilities meet social and safety obligations along with mandatory efficiency and cost controls. Building design, consequently, reaches beyond clear height and loading doors to include staff wellness, LEED certification, landscaping, and on-site water retention. Industrial tenants, moreover, are demanding greater efficiency from landlords and the buildings they occupy as the e-commerce revolution is applying significant downward pressure on costs.

To understand how landlords, users, and developers are trying to cope with warehouse demand in the e-commerce era in concrete terms, consider the markets of the Inland Empire, Los Angeles and Seattle—three of the leading industrial markets in the nation—as case studies. In contrast to the big box distribution centers with high clear heights—typically, a minimum of 32 ft or higher—which dominate the Inland Empire, what is most in demand in LA are “last-mile distribution” facilities. Throughout Los Angeles there is a significant contingent (i.e., over 240 MSF) of small (10K-50K SF) low clearance (18’-30’) buildings. The 10K-50K SF facilities are being leased to focus on swift throughput delivery using modern “pick-and-pack” racking systems rather than keeping high levels of inventory. Ceiling heights are not as important as accommodating a large number of delivery vans and ample parking for employees. The appetite for such spaces has transformed the fortunes of particular Class B and Class C properties which happen to be ideally situated. Once considered obsolete and irrelevant, they are now prized commodities in infill markets. 24’ to 30’ warehouses, while suitable for manufacturing, are hopelessly inadequate for the e-commerce platform. Although we have seen several successful examples of raising roofs, they do not work universally for e-commerce tenants.

While clear heights are of little consequence to last mile facilities, they are of paramount importance to new industrial developments. At a minimum, newly built industrial warehouses must have clear heights of 32-40ft or higher. Unfortunately, in infill markets such as Los Angeles or Seattle, land is scarce and the cost of construction is high, sometimes prohibitively so. As a result, it is simply not possible to build wide expansive distribution warehouses with clear heights meeting this requirement. The buildings just don’t pencil.

In response to these constraints, owners and developers in infill markets are using atypical construction measures in new developments to meet the demand. Rather than building out, they are building up.

Multi-story warehousing is not a new paradigm. From the turn of the century, multi-story warehouses flourished throughout American cities. However, over the past 50 years they were largely ignored. Prologis, one of the largest and most respected industrial landlords in the world, has significant experience in multi-story warehousing, having built 53 structures throughout Asia. At present, Prologis is eyeing densely populated, supply constrained cities within the US to expand their presence. Industrial architects in major markets are being asked to design multi-story facilities. Seattle, Washington is presently the first US city to announce a Prologis three-story, 589,615 square foot fulfillment center known as Georgetown Crossroads. It is the first “ground-up” multi-story development in the US. The multi-story facility will have ramps for truck access to second and third floor loading docks, plus a freight elevator. Brooklyn, NY is not far behind with a 400,000 SF project underway. Committing to a multi-story facility is no mean feat. It requires significant research and capital.

In contrast to the multi-story approach taken by Prologis, the owner-user of a site in the City of Industry is taking a different tack. As a manufacturer and retailer of heavy blankets and comforters, the owner is constructing a warehouse with a 60-foot clear height—all as one unified large slab. A development constructed in such a way is unheard of; indeed, to date, it is the only one known to exist. The building is expected to be up and operational by 2019. Although unique and radical in its construction and design, the building is simply another example of the monumental changes that intense industrial demand, wrought by e-commerce, is bringing about to the U.S. industrial sector.

Sources: Costar, Statistca.com, WSJ

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