Forecast: Increasing Competition for DC Sites Closest to the Most Customers
By Kris Bjorson, JLL
Rapid omnichannel growth from retailers with an adapting supply chain environment are among the driving forces of change in 2015. Following the biggest Cyber Monday ever, retailers and e-commerce companies continue to engage in a heated battle for the biggest distribution center facilities in locations close to large populations. As retailers bow to the customer demand for instant delivery gratification, JLL market data shows rising rents and a growing number of tenants searching for such distribution space. More than 30 tenants are currently seeking big box distribution centers of one million sq. ft. or more nationwide, says JLL, with demand outweighing immediate, available sites by nearly three to one.
Retailers everywhere are analyzing how close their distribution centers can be to their customers because proximity holds the key to profitability in this era of same- and next-day delivery. Major cities and secondary logistics corridors alike are citing swift development from retailers trying to get ahead of their competitors.
Rising Rents
Competition for space near East Coast seaports (New York/New Jersey, Savannah and Charleston in particular), is strong and will continue to drive rent increases in 2015. This trend will continue as supply chain executives seek to avoid delivery interruptions from congested West Coast seaports and truck driver shortages. For example, distribution space at the Port of Savannah saw more space leased in half of 2014 than in all of 2013.
Despite strong demand, supply isn’t rising as fast as in past ‘boom’ cycles — another major factor fuelling the battle for space, and rising rents. Developers remain cautious regarding speculative development, keeping their investment in speculative distribution centers measured in the coming year.
In 2015, approximately 171 million sq. ft. of new distribution space is expected to deliver nationwide. These new deliveries represent the highest level in seven years, but still fall below the 40-year average of 178 million sq. ft. per year. At year-end, nearly half of 2014 construction activity was taking place in the nation’s six largest logistics markets (Los Angeles; Inland Empire, California; Dallas/Fort Worth; Chicago’ New Jersey’ Philadelphia’ and Atlanta), leaving supply even more constrained in secondary markets.
2015 Global Demand Drivers
Retailers, consumer goods and e-commerce companies are driving nearly 40 percent of all industrial real estate demand. A new JLL report on global e-commerce points to four major 2015 retail distribution trends:
1. Online Grocery Shopping. Grocery shopping as we know it is changing. Boston Consulting Group (BCG) expects the global online grocery market to increase from $36 billion in 2013 to $100 billion by 2018. This expansion from an industry with highly perishable goods requiring quick delivery and near-proximity will add urgency to the already overly-saturated demand for logistics facilities near major global population centers.
2. Customers demand full channel integration. Delivering a seamless customer brand experience means using all channels — stores, websites and mobile platforms that must work together. And so should their real estate. Outdated distribution centers that don’t support an integrated, omnichannel strategy will require updating or even eliminating. Likewise, stores must support e-commerce transactions without cross-channel glitches.
3. Sophisticated supply chains strategies reshape real estate. Creative logistics solutions are pushing retailers in new directions. Amazon’s ‘anticipatory shipping’ threatens to take consumer expectations about convenience to the next level. Another potential new development is the introduction of the ‘click and collect’ concept, where retailers partner with third-party logistics (3PLs) companies to allow customers to pick up online orders from convenient locations such as train stations, convenience stores or airports. As these strategies play out, both retail properties and distribution networks will change.
4. Flexibility = profitability. Location has long been a prime success factor for retailers, but it takes on a much broader scope in the new retail landscape where the location of store fronts, fulfillment centers and distribution centers all take on equal importance. To keep up with rapid changes to the market, retailers must plan their distribution networks and buildings with flexibility in mind. For instance, more retailers are using stores to help fulfill online orders, which may require adjustments to store layouts, dedicating more space to the backroom.
Customers today are looking for a smooth experience and responding to these trends by evaluating your business model can help you understand the changing retail landscape: the journey from the distribution center to the store.
Kris Bjorson is international director, head of retail/e-commerce distribution, JLL. With a focus on maximizing business results for corporations, he also founded Supply Chain and Logistics Solutions, which integrates supply chain strategy through real estate implementation.