Amazon’s Next Chapter – December 2018
Carrie Rossenfeld | November 26, 2018
From SoCal Real Estate’s December 2018 issue:
Anyone would be hard-pressed to find a bigger disruptor to the commercial real estate industry in the last 50 years than e-commerce. This viral development has created great shifts in the retail and industrial sectors that few would have seen coming in the 1990s, and Amazon.com has been at the forefront of it.
The final piece to the e-commerce puzzle for the last few years has been last-mile delivery and logistics strategies — actually getting the product in the hands of the consumer. A representative of CapRock Partners tells SoCal Real Estate that the firm is currently bullish on its last-mile strategy and is working to complete three industrial projects in the Inland Empire West.
As we reported in August, Canadian developer Ivanhoé Cambridge has acquired two land parcels in Ontario, California, from CapRock Partners and plans to develop Colony Commerce Center Phases 1 and 2, comprising 11 class-A industrial buildings at a cost of $450 million, a source representing the buyer reported. In a statement, the source said that the project will contain nearly 3 million square feet of leasable space; offer a variety of building sizes including 600,000 square feet, 700,000 square feet, and 1 million square feet; and will be developed by CapRock on behalf of the owner.
Jon Pharris | Courtesy a representative of CapRock Partners
Including Colony Commerce Center Phases I and II, CapRock will be undertaking construction on more than 10 million square feet of logistics properties in the Western United States through early 2020. As we have also reported, among these are Serrano Business Park in Jurupa Valley, California; Norco Business Park in Norco, California; and either build-to-suit space for industrial occupiers or a number of speculative industrial buildings on a 26-acre land site on Nancy Ridge Road in the Sorrento Mesa area of San Diego.
The CapRock representative says that e-commerce sales are expected to grow nearly 40 percent between 2016 and 2020, and as of January 2018, e-commerce-related leases comprise about 60 percent of all leases in Southern California’s Inland Empire and 38 percent of leases in Los Angeles and Orange Counties, according to the U.S. Census Bureau and FTI Consulting.
“By now, most of us in commercial real estate are realizing the sheer magnitude the ‘Amazon effect’ and the explosive growth of e-commerce is having on our industry,” Jon Pharris, president of CapRock Partners, tells us. He adds that this effect is manifesting itself in e-commerce, the demand for class-A industrial space, and last-mile delivery and the need for small-box industrial product.
Pharris says, according to a recent report by Cushman & Wakefield, e-commerce-related leases have accounted for approximately 25 percent to 33 percent of all industrial leases in the U.S. over the past several years, and this percentage is even higher in Southern California. “In major industrial markets with large populations, the e-commerce trend is even more pronounced. Approximately 40 percent of all new leases in Southern California are related in some manner to e-commerce.”
Coupled with a healthy U.S. economy and historically high consumer confidence, e-commerce is positioned to continue growing to new heights as people of all generations — particularly millennials —grow more comfortable ordering goods online, Pharris adds.
The “Amazon effect” has also created an increasing demand for class-A industrial space in SoCal. The increased demand for rapid delivery is creating a positive net effect on this demand, especially in primary and secondary markets, Pharris says. “Fulfillment companies and the logistics behind the delivery systems are evolving and becoming more sophisticated and exponentially more efficient.”
The space itself and what it houses is also changing because of e-commerce; the scale and design of industrial buildings is shifting and e-commerce is also impacting the sophistication of the material handling equipment inside these buildings. “Tenants like Amazon prefer different building specifications than most traditional industrial warehouse occupiers and require 40-foot ceiling heights, more employee parking, and fewer loading dock doors,” Pharris says.
In addition, last-mile delivery and the need for small-box industrial product is becoming a pressing issue thanks to e-commerce. Pharris says with the evolution of last-mile delivery, smaller warehouses with simpler design requirements are needed, but they must also be in infill locations, surrounded by densely populated neighborhoods. “Formerly functionally obsolete buildings (i.e., low clear height, poor loading, no trailer parking areas) are transforming into potentially desirable buildings for last-mile fulfillment needs for high throughput uses.”
And this demand will only increase, Pharris says. “Amazon has leased nearly 14 million square feet in the Inland Empire since 2013, and they are rumored to be in the process of leasing several additional buildings. At this point it seems as though Amazon is on track to occupy more than 20 million square feet within the next two to three years in the Inland Empire alone.”
In short, Pharris says more industrial warehouse space is needed to meet the growing demand for e-commerce logistics. “We believe there is still a runway for industrial leasing velocity in every West Coast market where CapRock invests and develops.”
Looking ahead, Pharris says the next leg of e-commerce is in the growth of cold storage and food distribution. “Amazon’s acquisition of Whole Foods was the first step in this phase of the evolution. Right now, the percentage of online grocery sales are in the low-single digits, but growth of online grocery sales is in the double digits. Nearly every major grocery store is working to re-vamp a portion of its business model to compete with online grocery shopping. This area will be the next leg in supporting industrial warehouse leasing momentum.”
The convenience factor will continue to drive online purchases: ordering online is convenient, and with only a few clicks on a smartphone, it’s fast, cost-effective and easy. And, Pharris says, as online shopping options continue to grow and more products become widely available in different areas, retailers are learning to reshape their business plans to effectively reach consumers and capture repeat business in this new era.”
According to Pharris, Cushman & Wakefield reports that e-commerce is anticipated to be more than 25 percent of all retail sales by 2025, but it already accounts for more than 30 percent of all GAFO (general merchandise normally sold in department stores) sales. “Retailers no longer need as much expensive storefront at brick-and-mortar locations to store inventory. Instead, retailers are keeping inventory offsite for a largely reduced cost at nearby centralized distribution hubs positioned for efficient two- or same-day delivery.”
A rendering of Serrano Business Park | Courtesy a representative of CapRock Partners
He adds that industrial real estate in the Western U.S. is the beneficiary of a healthy global economy via growing port volumes, resurgent consumer spending, changes in consumer behavior with e-commerce, and a growing population base.
There is one overlooked statistic in the e-commerce equation: the increase in global freight since e-commerce exploded. “With global freight projected to increase 177 percent from 2015 to 2020 (according to Cushman & Wakefield), this incredible growth can be partially attributed to how fast the business cycle has increased as consumers expect same or next-day delivery,” Pharris says. “With many goods still manufactured overseas, trendy consumer items are now on a plane in addition to being on a traditional shipping boat.”
Right now, he points out, many of the major global freight airports within the U.S. (including LAX, JFK, and O’Hare) are nearly at capacity, so there will be a growth in secondary freight airports such as the Ontario Airport, which will benefit from industrial absorption since many uses surrounding airports tend to be industrial in nature.
Also noteworthy, Pharris says, is the “pied piper effect” with major e-commerce users that occupy the mega-box industrial buildings. “Large e-commerce users in major markets create their own ecosystem and draw their key suppliers into their orbit. When a large e-commerce user such as Amazon occupies a new space, smaller suppliers also pop up within close proximity.”
Pharris points out that these businesses include the logical tenants such as FedEx or UPS, in addition to other complementary suppliers that require smaller spaces of approximately 50,000 square feet to 150,000 square feet, located as close to the large distribution center as possible.
Finally, even though there are millions of square feet of industrial under construction throughout the country, vacancy is at all-time lows in almost every market, Pharris says. “Demand continues to outpace supply, although there are some warning signs of too much construction in certain areas.”
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