John Skoglin, SIOR, vice president of CBRE in Baltimore, was strolling through his local supermarket one day in 2021 when suddenly he stopped short—he had a vision of the future.
“I noticed all the home-delivery workers gathering grocery orders, and I thought, this is what e-commerce is coming to,” he recalls. In his futuristic visualization, grocery stores will take over the real estate that was once a department store, and everything inside will be available to be ordered by computer. The items will be electronically registered, through automation placed in a delivery box and loaded onto electric vehicles, and delivered to a drop box at a home. The billing would be electronic as well.
“If a military person sitting in an office in the United States can fly a drone somewhere else in the world and shoot missiles, the idea of an electric delivery truck is much easier to grasp by far,” he adds. “When all this happens, warehouses and distribution centers would be the initial point of departure for commodities that will all eventually be ordered, ascertained and shipped via automation.”
Skoglin’s vision is not all that farfetched. Some of it is already happening. In 2018 Amazon launched its cashier-less Amazon Go store where cameras and sensors account for what people bought. In the last five years, there have been 60 conversions of retail space to “industrial” across the United States. “That’s just the beginning,” observes Conrad Madsen, SIOR, co-founder and partner of Paladin Partners in Dallas. “The big trend is the last half mile of delivery and how that will change for cities with extreme population density. An old Best Buy or a standalone big box store that has sat empty for years will be repurposed for Amazon or Walmart for last mile distribution. The retail centers of America will change due to e-commerce.”
The development of e-commerce will enhance what was once the old industrial market, whether it was in a major logistics center such as Dallas or other cities scattered around the United States. For example, a well-known e-commerce company recently leased a 1.2 million square foot Trammel Crow building in Hagerstown, Md., which sits on an important interstate over 100 miles from the Baltimore-DC corridor. It is spending $250 million to convert the building to a distribution center in addition to leasing another 800,000 square foot building. These will be distribution centers just for appliances like refrigerators or dishwashers, all of which will be electronically ordered and distributed.
Salt Lake City sits outside the country’s main distribution corridors, but the industrial market there, too, is being changed by e-commerce, except at a local level. Skyler Peterson, SIOR, a managing director at Newmark ACRES in Salt Lake City, had one of his best years ever as a broker in 2020.
E-commerce will continue to grow post-COVID because COVID changed the nature of how people want to do business.
Salt Lake City boasts over 8 million square feet of industrial supply in the pipeline and about 6 million of that has already been pre-leased. At year-end 2020, warehouse vacancy for the metro was at the sub-3% level.
This is not just because big companies such as Amazon are taking more space.
“Within the last five or six years, there has been a big uptick in e-commerce due to the quest for delivery speed,” says Peterson. “Amazon paved the way for the smaller e-commerce companies. We’ve seen demand from big national groups, but also smaller, local retailers with an e-commerce presence.”
This is the arena that made 2020 such a good year for Peterson. He gives two examples.
An Orem, Utah, company called Chirp makes a circular exercise loop designed to fit between the shoulder blades to give back pain relief. Some refer to it as a yoga wheel. The company had been around for at least a half-decade with decent sales, but then came the COVID pandemic, and its online sales volume quadrupled. The company turned to Peterson to find 100,000 square feet in the Salt Lake City market, which he did.
Another Utah entrepreneurial effort also went bonkers due to the pandemic. A Salt Lake City company called Cosset makes numerous body care products but is best known for its bath bomb. “Pre-COVID, the company was more focused on brick and mortar,” says Peterson. “They shut down those stores and are strictly online. They have since doubled in size due to e-commerce.”
Cosset started up about five years ago with 3,000 square feet, before Peterson found them 25,000 in 2019. Last year, the company moved once more to 45,000 square feet.
“E-commerce will continue to grow post-COVID because COVID changed the nature of how people want to do business,” says Peterson.
The five major logistics centers in the United States traditionally have been New York/New Jersey, Los Angeles, Chicago, Dallas, and Atlanta, due to port proximity, major airport, and/or intermodal and highway presence. The advent of e-commerce won’t change that dominance but should only enhance it. Other cities will also pick-up new distribution development to service local and regional markets, but goods that need to be moved nationally or regionally will still go through historic logistics metros. “For e-commerce you are always going to have distribution centers in metro areas, but the big ones are going to be in the most centralized, logistically advantageous areas,” says Madsen.
He can back up that statement. Over the last 10 years, he says, DFW has been delivering 25 million to 30 million square feet of new industrial product annually. In the midst of COVID, none of that building has slowed down.
You have to stay ahead of the curve so you know what is going on and adapt accordingly.
Did e-commerce necessitate a change in distribution buildings? Yes and no. The biggest difference so far has been the erection of higher structures, from an average of 28-foot-clear in 2000 to 40-foot-clear today. Also, more trailer storage and staging areas for trucks and large staging bays. The key is the higher clear. Just by going, for example, from 32-foot-clear to 36-foot-clear, that creates the ability to rack one more pallet position.
Madsen points out there’s another advantage to added height. Due to the extra space, more product can be “in the same amount of square footage.” He explains, “You are getting more cubic feet because you are going higher, but the footprint of the building stays the same. You can keep your footprint size but pay on less square footage and have a building that is more efficient by racking higher.”
Intuitively, one thinks it’s better automation that makes higher racking feasible. While in a sense that might be true, the real breakthrough was an improvement in old technology—the forklift—which can now go higher but is more stable than the old models.
“Tap into technologies,” Peterson recommends. “Understand how e-commerce functions and delivers. These are not your traditional warehouse models; some of these buildings need to be very specific.”
Pre-COVID, 11% of all retail sales were online, Madsen reports. “Now that number has jumped to 16%. E-commerce has grown 5% just since the beginning of COVID. Retail sales will never be 100%, but at 16% it still has so much further to grow.”
So how should brokers react to all these changes due to growth of e-commerce? Skoglin maintains the key is “to stay in-tune with the technologies. You have to stay ahead of the curve so you know what is going on and adapt accordingly.”
This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.
CONTRIBUTING MEMBERS
Conrad Madsen, SIORSkyler Peterson, SIOR
John Skoglin, SIOR