Prior to the onset of the coronavirus, the increase in online sales was driving growth in the industrial real estate sector. JLL found that nearly 35 percent of all industrial leasing was attributed to e-commerce pre-pandemic. After March 2020, as online sales experienced an explosion in growth, demand for distribution space skyrocketed, accounting for the majority of all industrial leasing in 2020 — Amazon alone represented 55 percent of total U.S. industrial absorption. The result? A flood of investment dollars into the industrial real estate sector — the infrastructure (i.e., warehouses) needed to build out the same-day/next-day e-commerce network is not dissimilar to the railroad industry in the late 19th century.
Industrial Real Estate Steals Some Moves from the Office Sector
In 2021, leading developers and designers of logistics properties will increase their emphasis on ergonomics and employee wellness. As online sales continue to grow, demand for warehouse workers and fulfillment professionals will also increase. In an already competitive labor market, warehouse amenities can help attract more workers by providing a safer, healthier, and more enjoyable environment for employees. This human-centric approach to warehouse operations will enhance productivity, allowing workers to focus more on order fulfillment and problem-solving, working in sync with warehouse robotics, which will increasingly perform more repetitive and injurious tasks.
Furthermore, e-commerce distribution centers will need to push closer to the urban core and large population centers. These locations are extremely land-constrained and tight on parking. Therefore, distribution centers will need to offer shuttle services for employees to and from public transit. Distribution centers will need a symbiotic relationship with communities in which they are located, so careful attention will be paid to community outreach, career development, and public spaces.
Distribution centers of the future will infuse design elements from the office sector. Air conditioning, for example, is currently available to only 8 percent of warehouse workers! In order to attract employees and maintain positive community relations, warehouses may look a little more like offices, with fitness centers, community spaces, and enhanced wellness infrastructure such as air quality systems and natural lighting.
Scale and Proximity Become Increasingly at Odds
E-commerce distribution centers will need to push closer to the urban core and large population centers. As the world recovers from the COVID-19 pandemic, it is anticipated that the surge of online ordering during the pandemic will be sustained. Consumers became used to shopping online when they were unable to go into stores — utilizing everything from Amazon Prime to grocery delivery to swiping up based on an influencer’s recommendations. With that ease of shopping comes an expectation that those deliveries will arrive the same or next day.
This has forced any retailer with a direct-to-consumer business to immediately invest in their e-commerce distribution network. Within a month after the national lockdown, the industrial market saw many new occupiers in the market. The speed and size of e-commerce space requirements are staggering.
The common themes throughout all of these new e-commerce distribution center requirements are:
- Proximity — locations in urban cores or densely populated areas
- Scale — very large distribution centers with very large employee and truck parking areas
- Speed to market — the average e-commerce distribution center needs to be operational within four months of their search
- Labor — a large (and preferably trained) work force in close proximity to the distribution center
Investor Demand Mirrors Occupier Demand
From 2017 to 2019, the institutional investment community increased their industrial investment allocations by 95 percent. This trend actually accelerated after the COVID-19 pandemic, with a 10.6 percent increase in 2020 and a 10.9 percent increase in the first half of 2021.
The flow of capital into the industrial sector has largely provided solutions to the backlog of industrial demand, as noted above. However, land and building prices have increased significantly. For example, the average single asset deal price increased over 20.6 percent, from $16 million in the first quarter of 2020 to $19.1 million in the first quarter of 2021. These price increases will undoubtably increase rents and, perhaps, consumer prices. However, increased capital flows into the industrial sector will make possible the tectonic shifts necessary to transform the e-commerce distribution network to an efficient, labor-friendly, and sustainable supply chain.
Occupiers Inflexible on Flexibility
Real estate is by nature inflexible. Occupiers and investors make huge upfront investments in distribution centers in exchange for 10- to15-year lease terms. Occupiers have to predict peaks and troughs in inventory demand into their decades-long lease commitments. However, recent shocks to the supply chain like the COVID-19 pandemic, the port of Los Angeles backlog, and the Suez blockage increase the need for flexibility into the supply chain.
Forward-thinking industrial owners and property managers will need to take measures to reduce the carbon footprint of their properties. Supply chain flexibility will not supplant long-term leases. Instead, supply chain flexibility will spur new technology that links shadow industrial space or unused trailer parking and allows principals to transact on an incremental, on-demand basis. While there are some innovators in this space today, there is a huge opportunity yet to be realized by providing flexible supply chain solutions.
Sustainability Starts Now
In 2021, forward-thinking industrial owners and property managers will need to take measures to reduce the carbon footprint of their properties. Sustainability will be a driving force for change as added pressure from investors, consumers, and regulators encourages companies to more closely evaluate the environmental impacts of their businesses.
Supply chain carbon neutrality requires that a product or company be able to remove the exact same amount of carbon dioxide from the atmosphere that it emits in the process of development, production, and distribution. This is no small task. Even when purchasing carbon offsets or credits, companies will have to focus heavily on emissions reductions across their entire logistics and distribution network. In the industrial real estate sector, this will require significant investments in areas such as high-efficiency roofing and insulation, LED lighting, rooftop solar panels, wind turbines, and other renewable power sources.
In 2021 the theme of sustainability will not only change the design and specification of industrial properties, but it will also be a force of change for all industrial operations. Industrial investors and occupiers are increasingly aware that now is the time to start sustainable initiatives if they are looking for results by 2030.
This a very exciting time in the industrial real estate sector. The industry is experiencing a complete transformation. Acute changes from the retail consumer are spurring massive changes in institutional investing, warehouse design, and supply chains. These changes will be felt for years to come.