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E-Commerce and Industrial Real Estate: “Last Mile” Delivery and What Else You Should Know

In recent years, the extensive disruption to the retail real estate landscape caused by the expansive growth of e-commerce (such as altered consumer shopping habits, increased brick-and-mortar vacancies, and big box retailer bankruptcies) has been well-cataloged and analyzed both within the commercial real estate industry and, more broadly, by mainstream media.  What has garnered less (but increasing) attention are the various ways that e-commerce has interacted with the industrial real estate sector.

One of the hallmarks of e-commerce is the customer’s expectation for a product ordered online to be quickly and inexpensively delivered.  In order for e-commerce retailers to satisfy such customer expectations, the implementation of an efficient “last mile” distribution strategy is critical. 

For such strategy to succeed, warehouse and logistics facilities, stocked with an abundant variety of products, need to be situated in close proximity to large customer bases and have ample access to major roadways so that delivery time and costs can be minimized.  While that objective is clear, industrial properties present challenges to its accomplishment.  Many existing industrial properties are not well-suited for the needs of e-commerce warehouse and logistics facilities – specifically, they can be too small, have low ceiling heights, possess inadequate loading dock infrastructure or lack sufficiently durable construction to support substantial floor loads and heavy wear and tear.  Given the likelihood of increased truck traffic and noise attendant to such facilities, these properties are often confined by zoning laws and practical considerations to industrial areas in the urban periphery that may not be best-situated to meet the demands of the e-commerce industry.  Another issue posed by existing industrial sites is that many of them have historical manufacturing and other uses that can create potential environmental concerns that may necessitate remediation.

Notwithstanding the above challenges, the boom in e-commerce over the last few years has driven demand for industrial properties located in or near metropolitan population centers, which has led to a historically low national vacancy rates and higher rents for industrial properties.  This has given rise to an abundance of investment activity in the industrial real estate sector leading to intense competition for scarce industrial properties.  For example, Blackstone, in an effort to grow its “existing [warehouse and logistics] portfolio to meet the growing e-commerce demand”, recently won an auction to acquire a portfolio of roughly 1,300 warehouse properties in the U.S. for $18.7 billion.  That transaction was among the largest industrial real estate deals ever completed. 

The yearning for more industrial properties suitable to satisfy the demands of e-commerce businesses has also spurred the development of new warehouses and logistics facilities as well as the redevelopment or repurposing of existing properties.  In terms of new development, in New York City alone there is currently in excess of “700,000 feet of new warehouse and other industrial space being built . . . and another 4.8 million feet proposed” for construction.  One relatively recent development trend is the construction of multistory warehouse facilities in New York City, Seattle and other locales where land is scarce and/or land prices are high.  However, the cost to build multiple floor warehouse facilities has been estimated to be at least double the cost of redeveloping an existing building.  That higher construction cost will need to be passed on to tenants willing to pay a premium to use this sort of new facility - with rents for multistory warehouses estimated between two and three times higher than for a single story warehouse.  A creative example of repurposing an existing property is the conversion of the approximately 3.8 million square foot parking garage under Millennium Park in Chicago, Illinois, into a “last mile” logistics facility. 

With e-commerce forecast to continue to grow considerably over the next decade (and beyond), it seems likely that warehouse and logistics facilities will remain in high demand (both from e-commerce businesses and real estate investors and developers looking for favorable returns) and have a critical role to play in conquering the “last mile” distribution of products from business to customer.