Online retail sales for 2013 were estimated at $263.3 billion, an increase of 16.9% from 2012 and are anticipated to reach $370 billion by 2017. E-tailing is the wave of the future. Sales from online purchases make up a higher percentage of the total sales for traditional retailers than ever before. E-tailing will continue to outpace the growth of physical retail stores and it appears that the future of retail is not more store or shopping centers but more warehouses and trucks.
The fast rise of e-com has intensified demand for industrial real estate space and online sellers have become the fastest-growing segment of warehouse occupiers. With retailers and 3PLs seeking more space to keep up, industrial leasing activity reached 444.1 million square feet in 2013, the sector’s strongest performance since 2005. Warehouse vacancy has now declined for 15 consecutive quarters, with overall vacancy dropping 80 bps in 2013 to 8.0%. Demand for newly built, large distribution centers that cater to e-commerce has been particularly robust in this recovery and new industrial construction activity has been rising. In the last four years, the warehouse sector has seen 170 million sq. ft. of new development to satisfy this demand.
Home Depot has launched a major upgrade of its fulfillment processes to support burgeoning e-commerce sales as it expects double-digit growth online. It recently opened the first of three new direct fulfillment centers (DFC) designed to speed online orders to consumers through distribution channels across its supply chain. The three new DFCs will be able to deliver 90% of online parcel orders within two days using ground service. The company will spend $300 million this year on the fulfillment centers, mobile technology, facility enhancements and a warehouse management system.
It is clear that industrial development is being driven by changes in the supply chain. Developments in logistics and technology have driven the demand for newer and bigger warehouse and distribution centers. Supply chains must be more flexible and responsive, with distribution centers equipped with the latest technology. Direct-to-consumer sales require retailers to consolidate online and store-based fulfillment operations under one roof, which is spiking the demand for high-tech, big-box facilities. The warehouse and distribution centers have now evolved into retail/industrial hybrids. Technological advances in fulfillment are affecting the demand for warehouse space, influencing not only building size requirements, but also the location and build-out of the facilities. The need to keep larger stocks of inventory and to package and send out items in-house has generated the need for bigger fulfillment centers.
The construction of mega-sized distribution centers, which are 1.0 million square feet plus are becoming more prevalent. More than half of the country’s 1.0-msf warehouse & distribution buildings have been constructed since 2000, with 25.0% of that inventory delivering since 2007. Tenants like Amazon.com, Procter & Gamble, TJ Maxx, Home Depot, and Walmart constructed or broke ground on 1.0 msf build-to-suits in 2013.
Not only has the square footage of new buildings increased substantially, but the average clear heights have risen and the total number of loading docks and doors has multiplied. Clearance height in the new facilities is often 36 to 40 feet to accommodate two mezzanine levels for picking and packing. Industrial projects with clear heights greater than 30’ clear account for 78.3% of the total under construction. Newly built fulfillment centers are also differentiated from traditional distribution centers by specialized features including greater building depth, with wider column spacing to accommodate a new generation of warehouse management systems. The facilities have specialized material handling equipment and racking, and frequently a cross-dock configuration.
The growth of multi-channel distribution and e-commerce have pressured the distribution center and supply chain to run more efficiently and requires significant adaptation at the facility design level and strategic location analysis. With the dramatic changes in the movement of goods, the industrial sector must dramatically add to the supply of space to support the demand, particularly in critical locations.