E-COMMERCE AND THE CHANGING U.S. INDUSTRIAL LANDSCAPE GLOBAL RESEARCH AND CONSULTING JULY 2014

Transcription

1 E-COMMERCE AND THE CHANGING U.S. INDUSTRIAL LANDSCAPE GLOBAL RESEARCH AND CONSULTING JULY 2014

2 EXECUTIVE SUMMARY Online shopping boom By 2017, online sales could account for more than one-tenth of all U.S. retail sales. To keep up with growing demand and service requirements, e-commerce companies are making major investments in their supply chain, including state-of-the-art logistics facilities near major metropolitan areas. Omni-channel retailing To compete with e-tailers and keep up with disruptive customer demands, many traditional retailers are adopting omni-channel strategies focused on ensuring a seamless customer experience, offering the ability to buy anywhere at any time on any device. In many cases, this is shifting the point of sale away from the showroom floor and moving order fulfillment to distribution centers. The new big-box E-commerce companies and omni-channel retailers alike require advanced big-box facilities that functions both as a warehouse and an order fulfillment center. There is a limited supply of such facilities, spurring a new wave of development. 2

3 INTRODUCTION The Internet is fundamentally changing the way U.S. consumers shop and how retailers interact with their customers. In 2010, as consumer confidence and consumption began to recover, overall U.S. retail sales grew 5.8% while online sales grew 15.4%. This trend continued in Q1 2014, as online U.S. sales grew 15.0% compared to Q1 2013, while overall sales grew 2.4%. 1 Despite the rapid growth in online sales, e-commerce still only represents 6.2% of overall retail sales, leaving room for further significant upside. A study from Forrester Research forecasts that by 2017, 10.3% of all retail sales in the U.S. will be completed online. Figure 1: E-Commerce Share of Total U.S. Retail Sales 6.5% 6.0% 5.5% 5.0% 4.5% ONLINE-ONLY AND OMNI- CHANNEL RETAILERS ARE MAKING LARGE-SCALE INVESTMENTS IN THEIR SUPPLY CHAIN. In order to keep up with growing demand, onlineonly and omni-channel retailers companies that blend in-store, online and mobile channels to create a seamless consumer experience are making large-scale investments in their supply chain. This is stimulating demand for the limited supply of high-quality industrial properties nationwide, especially in key port markets and high-density population hubs, enabling owners of existing high-cube distribution spaces to raise rents and prompting the return of build-to-suit and speculative development. 1 U.S. Census, May 14, % Q Q Source: U.S. Census, May Figure 2: Total U.S. E-Commerce Sales $ Sales (millions) Source: U.S. Census, May Q Q Ecommerce Sales Q Ecommerce Sales 3

4 IMPACT ON INDUSTRIAL REAL ESTATE DEMAND The distribution model required by e-commerce companies and omni-channel retailers is reshaping the way U.S. supply chains are designed, altering the relationship between the industrial and retail real estate sectors. Many retailers are moving inventory away from their stores and into central distribution centers capable of serving as warehouses for their stores and fulfillment centers for online sales, stimulating demand for industrial space. Meanwhile, e-tailers are moving into larger facilities near major metropolitan areas and distribution hubs to speed up delivery times. NATIONALLY, CLASS A NET ABSORPTION REPRESENTED 40% OF ALL SPACE ABSORBED, DESPITE REPRESENTING ONLY 10% OF THE TOTAL INDUSTRIAL STOCK. Due, in part, to the growth of e-commerce, 2013 was the best year for the U.S. industrial market since The momentum carried over into Q1 2014, as virtually all U.S. markets were buoyed by strong demand for distribution space from the e-commerce sector. Supply chain demand was centered in major port markets inland and coastal resulting in strong absorption and shrinking availability in markets such as Atlanta, Chicago, Miami and Houston. Figure 3: U.S. Industrial Supply and Demand Completions and Absorption (MSF) Availability Rate (%) % 15% 14% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: Econometric Advisors, Q Completions (L) Absorption (L) A closer look at the numbers reveals the true impact of e-commerce on the U.S. industrial sector. In Q1 2014, demand was notably strong for Class A bulk distribution space the type of facility most desired by e-commerce users. Nationally, Class A net absorption represented 40% of all space absorbed, despite representing only 10% of the total industrial stock. In key markets such as Chicago and Dallas/Ft. Worth, the demand was even greater, with Class A representing 74% and 95% of leasing demand, respectively. Large e-commerce users such as Amazon and egg have been especially active in major markets. In addition, traditional brick-and-mortar retailers have been acquiring industrial space across the country in an attempt to shore up their online-driven supply chain network. Q % 12% 11% 10% 9% 8% 7% Availability Rate (R) 4

5 IMPACT ON INDUSTRIAL REAL ESTATE DEMAND Developers have taken note of the need for and shortage of bigbox e-commerce space, and have responded by kicking off a new wave of development. Overall, new construction levels are still well below the pre-recession peaks of 2005 and 2006, with the majority of deliveries still build-to-suit. However, most projects underway are related to e-commerce. For example, Amazon has launched an aggressive build-to-suit strategy, opening 27 new fulfillment centers across the U.S. since 2011, with eight of them, totaling 7.7 million sq. ft., coming on line in Figure 5: Largest U.S. Class A Markets, Q Market Class A Net Absorption % of Total Net Absorption Atlanta 4,557, % Chicago 1,804, % Dallas 4,203, % THE SHORTAGE OF PRIME BULK SPACE, COUPLED WITH STRONGER DEMAND, HAS REIGNITED THE SPECULATIVE DEVELOPMENT CYCLE. Meanwhile, the shortage of prime bulk space, coupled with stronger demand, has reignited the speculative development market, with approximately 40% of the million sq. ft. underway at the end of Q being developed on a speculative basis. Houston 600, % Indianapolis 536, % Inland Empire 1,432, % Jersey Central 834, % Jersey Northern 189, % Philadelphia 439, % Source: Research, Q Figure 4: Major 2014 E-Commerce Transactions TENANT MARKET S.F. TYPE Amazon SE Wisconsin 1,500,000 2 Amazon Inland Empire Source: E-commerce Specialty Group, Q ,200,000 3 Confidential Eastern PA 1,200,000 4 American Eagle Eastern PA 1,100,000 5 Confidential Indianapolis 1,000,000 6 Williams Sonoma Dallas 821,000 7 Bonton Columbus 740,000 8 Ebay Cincinnati 631,000 9 egg. com 10 Amazon Fresh Indianapolis 412,000 Seattle 318,000 Build to Suit

6 THE NEW BIG-BOX Despite momentum and buzz surrounding the e-commerce business, the sector is still in its infancy and holds potential for exponential growth. Sales are projected to grow 10%-14% annually through 2017, 2 which means that not only will current e-commerce users have increased space needs, but new entrants to the market will as well. According to s E-Commerce Specialty Practice Group, there are 30 million sq. ft. of active e-commerce requirements nationwide. 3 Traditional brick-and-mortar retailers have certainly noticed the changing landscape and have responded with a fundamental shift in the way they do business. Retailers initially responded by implementing multi-channel platforms, selling products either in a THE PATH A PRODUCT FOLLOWS THROUGH THE SUPPLY CHAIN HAS CHANGED, COMPELLING USERS TO CHANGE THE WAY THEY USE INDUSTRIAL REAL ESTATE. Adam Mullen Managing Director U.S. Supply Chain Services, store or the web. However, multi-channel has been quickly replaced by omni-channel. The difference between the two is subtle but significant. In the multi-channel model, brick-and-mortar and online warehouse and distribution functions are operated independently from each other, whereas in the omni-channel approach the two are seamlessly integrated. One feature of the omni-channel model is showrooming, where a customer will browse a selection of goods displayed in a store and then buy an item for delivery either in the store or online. Another trend that has emerged as a result of omni-channel is the buy at home, pick up at store strategy that many retailers have adopted to preempt the same-day delivery model that Amazon is implementing. The desire to make it easy for the consumer on the front end has had a tremendous impact on the supply chain, by creating even more complexity on the back end. Supply chains must build in flexibility and remain nimble as consumer demand planning is now further complicated by how and where products are bought. Given the disruption associated with speed and growing cost constraints, e-commerce companies and retailers are rethinking both their supply chain and industrial real estate strategies. For example, retailers are shrinking their footprints in stores, moving inventory that has historically been held at stores further up the supply chain to distribution centers. In addition, the path a product follows through the supply chain has changed, compelling users to change the way they use industrial real estate leveraging increased levels of automation and locating in areas that allow for faster delivery. The most significant and immediate change is at the big-box distribution center. In the past, the typical distribution center was centrally located and designed to serve numerous stores in multiple markets. These centers were mainly warehouses and required a relatively low number of employees to operate. However, many of these facilities don t meet the needs of advanced e-commerce and omni-channel users. Rather than functioning mainly as a warehouse, e-commerce requires a larger, more modern facility that serves as a fulfillment site as well as an inventory warehouse. The immediate impact is that the building itself must be much larger to accommodate not only the extra inventory, but also high-tech order fulfillment equipment. Moreover, e-commerce operations often run 24/7 and have substantially greater manpower requirements to manage order flow and inventory. Whereas an old facility might have employees per shift, a big-box facility requires 200-1,000 employees per shift. 4 Also, e-commerce facilities must be more strategically located to deliver an order to the customer s front door as quickly as possible. 2 Forrester Research, Q4 2014;eMarketer, April As of January Ecommerce Specialty Group. 6

7 THE NEW BIG-BOX As big-box facilities are in short supply, there is a supply and demand imbalance in the Class A market. Developers have responded by aggressively inking build-to-suit deals and breaking ground on approximately 45.7 million sq. ft. of speculative development. However, with 30 million sq. ft. of active e-commerce requirements, and demand likely to remain strong over the next few years, supply will not catch up to the demand anytime soon. Opportunities abound for owners of functional, well-located space and for landlords of vacant bulk space that are able to make an investment to upgrade to current e-commerce standards. Such investments should pay off, as the extremely constrained space market, coupled with rapidly growing demand, will likely result in significant rent spikes through Owners and investors who are early to respond to this market will be well positioned in the short term. Figure 6: Typical Distribution Facility Requirements TRADITIONAL TRADITIONAL distribution facility Over 100,000 sq. ft. 24- to 32-foot clear heights 40- by 40-foot bays Minimal employee parking At least 20 dock doors with cross-docking preferred but not necessary BIG-BOX distribution facility At least 300,000 sq. ft. of space At least 36-foot clear heights 52- by 52-foot or 60- by 50-foot bays Excess land (or parking structures) to accommodate increased employee parking Minimum of 40 dock doors and cross-docking BIG-BOX 7

8 SPOTLIGHT: INLAND EMPIRE With the pressure to find big-box space, many of the core distribution markets across the U.S. are experiencing a boost in development activity. Nowhere is this change more evident than in the Inland Empire. More than 16 million sq. ft. is under construction in the Inland Empire, accounting for approximately 14% of all industrial space being built in the U.S. Of the 34 projects under construction, 29 of them are at least 100,000 sq. ft. in size, many of which are specifically designed to handle e-commerce order fulfillment. The pipeline is also strong, as more projects are on the way. THE INLAND EMPIRE HAS STRONG REGIONAL TRANSPORTATION LINKS AND ENOUGH LAND TO ACCOMMODATE THE LARGER FOOTPRINT NEEDED FOR BIG-BOX CENTERS. Amazon has been a big player in the Inland Empire, recently committing to a 1.2 million-sq.-ft. project in Moreno Valley. This is in addition to its existing 1 million-sq.-ft. facility in San Bernardino, which employs 1,400 people. And it s not just Amazon, many e-commerce and third-party logistics companies are moving to new facilities, as the Inland Empire has strong regional transportation links and enough land to accommodate the larger footprint needed for big-box centers. Other recent deals include HauteLook, an online discount brand owned by Nordstrom, which moved into a new 604,000-sq.-ft. facility in late 2013, and Home Depot, which completed an 840,000-sq.-ft. build-to-suit project in early Figure 7: Top Five Inland Empire E-Commerce Developments Source: Research, October 2013 to. Company City Sq. Ft. Amazon San Bernardino 514,603 Amazon Moreno Valley 1,254,620 Home Depot Perris 850,000 OHL / Apple Rialto 718,000 Nordstrom San Bernardino 604,029 8

9 KEEP AN EYE ON... E-commerce is here to stay and industrial owners, investors, and developers will be racing to catch this wave. Keep an eye on the following issues that will impact the market going forward: Look for developers to start construction on a speculative basis on extra-large big-box facilities (500,000 sq. ft. or larger) that can be subdivided to smaller spaces. This approach should give owners the flexibility to accommodate a variety of e-commerce and distribution users. Secondary industrial markets should see more activity as e-commerce users seek distribution solutions closer to customers not located in major metropolitan areas. E-commerce companies will take smaller infill properties in major metros as a final stop for products, as same-day delivery service becomes more prevalent. The Marketplace Fairness Act, legislation which would mandate the collection of sales tax on all transactions regardless of the physical location of the retailer, may come up for a vote in the 2014 Congress. If passed, this new law would allow online retailers to locate in markets they are currently avoiding due to unfavorable sales or use tax laws, triggering demand in under-served or secondary markets. Q & A Scott Marshall, Executive Managing Director of Industrial Services for the Americas, and Kurt Strassman, Senior Managing Director for Orange County, discuss the rapid growth of e-commerce and what it means for the future of the U.S. industrial real estate market. 9

10 CONTACTS Scott Marshall Executive Managing Director, Industrial Services, Americas t: e: Follow Scott on Twitter: Adam Mullen Managing Director Supply Chain Services, U.S. t: e: David Egan Director, Research and Analysis Global Research and Consulting t: e: Gary Baragona Director, Research and Analysis Global Research and Consulting t: e: Jared Sullivan Senior Economist Econometric Advisors t: e: Matthew Ciampa Economist Econometric Advisors t: e: FOLLOW cbre Global Research and Consulting This report was prepared by the U.S. Research Team which forms part of Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. Additional U.S. research produced by Global Research and Consulting can be found at Disclaimer Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of.