Amazon, e-commerce and the growth of regional distribution hubs

Matt Mulvihill

Matt Mulvihill

Guest post by Matt Mulvihill, CBRE

E-commerce has been one of the main drivers of industrial activity in the Chicago market in recent years. Led by several large users, the e-commerce industry has been responsible for absorbing large quantities of space, driving rental rates and spurring significant levels of new construction.

However, while this activity will remain strong in 2017, it will likely slow in subsequent years, as these large users may not be expanding at the rate they have been beyond the calendar year. Still, there will be plenty of targeted opportunities for e-commerce firms to acquire, build or lease smaller, “last-mile” locations at infill and urban locations to meet growing consumer demand.

The roots of e-commerce growth can be found directly in new retail patterns, especially those of the millennial generation. According to CBRE’s recent global survey, Millennials: Myth and Realities, when millennials do shop on-line, they like to have orders shipped directly to their home – one-third of those surveyed always have it delivered, while two-thirds use home delivery “always or very often.”

Increasingly, on-line retailers and e-commerce firms are using faster delivery times as a method of competition. In many cases, consumers expect next-day or even same-day delivery.  This has made distributors and real estate providers rethink the traditional supply chain to now include not just a regional distribution hub, but smaller, urban locations in consumer hot spots.

Chicago has been a beneficiary of activity at both types of distribution locations.

For the regional locations, large leases have been steady and e-commerce was the most active user industry in 2016. Specifically, in the fourth quarter alone, e-commerce accounted for 34 percent of all activity, or roughly 2 million square feet of leasing.

The majority of this activity was in three large transactions – a 950,000-square-foot lease in Aurora, a 626,848-sqaure-foot lease in Waukegan and a 402,860-square-foot lease in Aurora.

All of this large-scale activity has highlighted something else in the Chicago market – a dearth of spaces available of 1 million square feet or larger. Users looking for space this size today would find nothing available, though there are several projects in progress that could potentially meet this demand later this year.

Construction starts to rev up

Developers have taken note of this lack of product for large users and, as a result, construction starts were at an all-time high in the Chicago area in 2016.

Currently, CBRE is tracking 20.8 million square feet of construction starts, the highest level recorded since the firm began tracking in 1996. Of those starts, speculative projects dominate activity and account for 14.4 million square feet, or 69 percent. The remaining 31 percent are build-to-suit (BTS) projects and totaled 6.4 million square feet.  In the fourth quarter alone, 13 projects broke ground for a total of 6 million square feet.

Currently, 54 tenants are actively looking for 100,000 square feet or more, for a cumulative of 15.4 million square feet. In the Class-A inventory, there is currently 16 million square feet of space that meets these requirements. The delivery of another 61 projects totaling 16.8 million square feet will help, but only 57 percent of this space is available, with the rest being pre-leased.

As noted before though, once property becomes available, it may not be absorbed as quickly, as many of the large e-commerce users have their regional distribution pipelines in place. However, smaller in-fill locations or last-mile warehouses in urban locations could see strong activity in the coming years.

Last-mile

According to CBRE’s recent study, Last Mile/City Logistics, the supply chain is often now viewed as a funnel, with the wide end representing larger, regional distribution centers as referenced above, and the narrow portion representing smaller, urban and infill locations. These infill buildings are often smaller in size with lower clear heights and greater car parking capabilities.

These facilities are not used for storing large amounts of product, but they do allow e-commerce users to stock a certain number of items that they guarantee for same-day delivery as they are often located in or near densely populated areas.

Locations in Chicago such as the O’Hare and I-55 markets, and small distribution centers in the city itself, are highly coveted right now, and activity in these regions should not slow down. To gain the competitive advantage of proximity to consumers, e-commerce providers will continue to seek out these “last mile” locations where available, and even begin targeted construction when possible.

As on-line shopping continues to grow, this component of the delivery system will likely only expand in the coming years.

Matt Mulvihill is executive vice president in the Schaumburg, Illinois, office of CBRE. He focuses on the industrial real estate needs of his clients.

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