2013 Real Estate Outlook Part I: Ecommerce Requirements Drive Demand for New Generation Industrial Space
Growth in “e-tailing,” as well as Class I railroad investment, is having a noticeable impact on the demand and development of industrial space.
Q1 / Winter 2013
Developers in 2012 took a cautious approach to building new big-box space amid the economic uncertainty and restrictive lending environment. The high absorption and low development levels of quality big-box space will have an impact on the market in 2013. Location-sensitive industrial users will either need to pay more for high-end space, or lease in buildings with less-than-optimal operational efficiency potential.
Clicks Change the Industrial Landscape
One-third of all demand for big-box space in the United States in 2012 was tied to multi-channel retailers or “e-tailers,” and e-commerce is growing at three times the rate of traditional retail. The shift in consumer buying patterns is changing the retail sector from “bricks and mortar” to “bricks and clicks.” Retailers are tapping multiple channels to sell their merchandise and are increasing online sales operations rather than increasing their real estate footprints, and this shift requires an entirely new distribution model.
E-tailers require spacious buildings with 36-foot clear ceiling heights to accommodate high-end racking systems. New-generation industrial is up to five times more labor-intensive than traditional retail distribution facilities, requiring more parking, mezzanine build-outs, increased building automation, and other features that are difficult or impossible to retrofit in older buildings.
With consumers expecting at least the option for next-day delivery and the added labor intensity of the facilities, locating near major population centers is a must. Approximately 35 percent of retail-related industrial demand is in the Northeast, notably in eastern Pennsylvania and central New Jersey, followed by around 27 percent in southern California markets such as Los Angeles and the Inland Empire. With e-commerce expected to grow by 11.5 percent and m-commerce (mobile) by a staggering 48 percent, demand for these highly specialized retail distribution centers will continue to increase in 2013 and beyond.
With the pressure to find big-box space, when will we see increased new development? Soon — in fact, the Inland Empire is leading the way with 9.9 million square feet already under construction followed by plans for a further 11 million square feet of new space in 2013. Philadelphia, at 8.3 million square feet, is not far behind.
Consolidation into modern space continues as distributors endeavor to optimize their real estate, labor, and transportation costs. But again, that space is becoming scarce — a reality that will drive build-to-suit and speculative development activity across even more markets next year.
Other areas we have earmarked for positive demand in the coming year are locations that have profited from Class I rail investment that provides intermodal options for shippers. Intermodal is the fastest-growing mode of transportation. Its appeal is driven by fuel- and carbon-efficiency, as well as by capacity constraints in the trucking industry that look to worsen as new regulations take effect in 2013.
Norfolk Southern’s Crescent Corridor expansion, which stretches from New Orleans to New York, will impact the industrial real estate markets in Memphis, Atlanta, Charlotte, Harrisburg, and northern New Jersey. Also, CSX’s National Gateway — being developed to bring double-stacked containers inland from Hampton Roads and Baltimore to the logistics hubs in Pennsylvania and Ohio — will also have a noticeable impact on industrial space demand as progress unfolds.
We expect to see small- to mid-size industrial users who have been dormant in most markets contribute to new demand in 2013. Market vacancy rates will continue to decrease at a measured rate, as new speculative and build-to-suit development slowly but steadily accelerates. However, tight financing conditions and slow rental growth will keep development levels below par, and prime-quality space will remain at a premium.
A Site Selector’s Checklist for Locating in the U.S.
Location USA 2019
Front Line: Manufacturers Look to Nontraditional Locations
A Changing Food Manufacturing Industry
2017 Food Processing
33rd Annual Corporate Survey & the 15th Annual Consultants Survey
Where to Invest in the Booming Aerospace Manufacturing Industry
2019 Auto/Aero Site Guide
The 3 Cs of Successful Site Selection: Company, Culture, and Community