E-commerce drives retail into warehouses

| stephen.preuss@cushwake.com |

With the increasing prevalence of e-commerce in the current marketplace, it seems that industrial and retail are becoming interdependent. The rapidly increasing growth of e-commerce in the past few years has suggested national economic alleviation and prosperity for the United States following the 2008 financial crisis.

This positive economic outlook has caused a “domino effect” from the e-commerce sector of retail into the real estate development market.

Today, e-commerce is driven by mobile technology nearly leading traditional bricks-and-mortar retail locations to obsoleteness. While the bricks-and-mortar retail locations are still prominent investments in real estate, online shopping provides convenience and affordability making it a more desirable option for shoppers as well as retailers.

The cheaper costs have prompted companies like Kohl’s, Footlocker, and Wal-Mart to allocate expenditures to Omni-channel retailing instead of traditional bricks-and-mortar retailing. According to a study done by Cassidy Turley, in 2012 online retail sales growth was 16.3 percent, three times as much as traditional retail sales growth, and is expected to continue growing at a similar rate in the following years. The transition of many retailers to e-commerce has prompted restaurants and grocery stores to increase volume so significantly that current shopping centers are composed of 60 percent food-related users, up from 40% in past years. Increase in growth has also been seen in health clubs, fast food restaurants, automotive retailers and dollar store retailers.

The rise of e-commerce has significantly motivated retail companies to increase major development. Amazon, the market leader in e-commerce, currently consists of 40 warehouses within 35 miles of major cities in the U.S. The increasing success of Amazon has led to a new 1.3 million square foot distribution center in Murfreesboro, Tennessee. In addition, construction has begun in Robbinsville, New Jersey for a “megawarehouse.”

The company plans on growing 40 million square feet over the next 3 years to increase its volume from 50 million square feet to 90 million by 2016 with hopes of developing faster and better shipping options.

According to a Wall Street Journal article “Wal-Mart: A Pro in Physical-Store Retail Logistics,” Wal-Mart, another major pioneer in the retail distribution market, is planning on spending $430 million this year alone on e-commerce investments to build distribution centers for a logistics system tailored for Web orders.

The industrial market is experiencing the most growth with the advent of the bulk distribution warehouse, the most popular industrial building today. As opposed to older warehouses that averaged approximately 50,000 square feet, the new distribution centers are at least 300,000 square feet, including a few over one million square feet. Otherwise, the old warehouses will face renovation costs that will cause mega-bulk product prices to increase further.

The increasing demand for distribution space, considered the largest driving force behind industrial growth, has led to price increases on warehouses across the United States. Given that e-commerce operations require certain warehouse specifics, there is a limited amount of land that may be used for the innovative business model. According to the same study by Cassidy Turley, the amount of suitable mega-bulk vacant square footage is approximately 40 million square feet, or 0.2 percent, of the 19.8 billion square foot U.S. industrial market. Cassidy Turley analysts estimate the Northeast United States area to have the least available space equating to just seven million viable square feet of vacant warehouses and approximately five million square feet of land for warehouse development.

With the low supply and high demand, warehouse prices in Queens have doubled over the past 2-4 years from the $75-$100 price per square foot range to $150 and over. Today, we have seen prices over $150 per square foot in College Point and over $200 per square foot in Flushing. With the lack of larger scale warehouse space available, price per square foot can potentially increase upwards of $250 per square foot.