CRE Midwest

E-commerce’s growth and impact on Chicago industrial space

The push by Amazon to provide same-day delivery and the soon-to-be open Google Shops has forever changed the speed of ordering and delivery for both online (e-commerce) and for brick and mortar stores in terms of their stock.

Contributed By Adam Haefner, Rick Daly and Dan Prendergast of Darwin Realty

 

The push by Amazon to provide same-day delivery and the soon-to-be open Google Shops has forever changed the speed of ordering and delivery for both online (e-commerce) and for brick and mortar stores in terms of their stock.

While brick and mortar retail stores will be affected by these changes, it is e-commerce leading the way: It is estimated by Forrester Research that e-commerce sales alone will reach $327 billion by 2016 and a Deloitte survey states that nearly 30 percent of all retail will be e-commerce by 2030.

Mega retailer Walmart noted that their sales growth in fiscal 2015 represented a 3.1 percent increase in net sales in US stores, while its web sales were up 30 percent in the first quarter over the previous year's first quarter.

That double-digit growth represented $3 billion in revenue growth over e-commerce of the previous year. It predicts a 30 percent growth in e-commerce sales in fiscal 2016. Of these changes, Mike Duke, Walmart Stores, Inc. president and CEO said “There is no doubt that our company is making the right investments in e-commerce to differentiate ourselves and become a better Walmart.”

The battle for the American consumer will play out in this field.

To what impact will this have on industrial real estate? It is estimated that nearly 30 percent of industrial space in the United States is dedicated to e-commerce today. Chicago's 1 billion-square-foot market has grown precipitously due to that demand. But what will the future hold?

E-commerce demand is driven by density of population as well as proximity to expressways and rail services that will deliver regionally for same-day or reduced-time delivery. For these reasons, users will continue to have demand for these types of e-commerce centers in Chicago.

The footprint of these centers is smaller and dictated by supply of efficient space or sites near the city proper. Rail demand has outpaced GDP growth since 2010. All of the major railroads are investing billions of dollars in infrastructure to keep pace with the demand.

Although we are seeing new projects such as the Elgin/O’Hare extension, Illinois is currently behind on maintenance and underfunded on road infrastructure.  It will be difficult to forecast the future until the current fiscal issues in the state are resolved.

This shift in demand for product availability will signal another shift in the types of industrial product we will see accommodating in the near future. In the past 10 years, the Chicago industrial market has experienced the reduction of small satellites distribution centers replaced by major regional hubs.

We have always seen major corporations evolve their supply chain systems to adapt to market force and there now seems to be signals that this trend toward major regional hubs over smaller satellites might reverse itself, with a caveat.

As there continues to be demand for the industries requiring next-day and same-day service for both the at-home consumer and the consumer expecting product in stores for pick-up, we will see the need for more satellite locations that cover smaller areas for faster delivery supporting the larger regional hubs. In addition, there is a need for more technology for faster product fulfilment and payments processing in addition to traditional warehousing, packing and shipping.

This will create continued demand for space and as land available for industrial development continues to diminish in strong logistics corridors such as I-55 and other infill markets, we will see more development pushing outward in all directions.

South East Wisconsin is already one of the most active markets for new development in the Chicago Metro area, and we have seen new development in the south I-355, west I-88 and the I-80 corridors.  These trends will continue in the future.

The O’Hare submarket, too, will remain at the center of this growth. However, if you look at the past several transactions in O’Hare, they were driven by alternative uses rather than air freight so it is not all tied to the O’Hare Modernization Project.

There remains a large appetite for infill sites and this will continue as there is lack of existing product that is state of art with high velocity loading and high cubed warehouse.

The submarket has responded with growth in terms of new industrial product through rehabs and tear-downs. With a low of 6 percent vacancy, a lack of large open land sites and rising demand, developers and investors will continue to look for rehab and tear-down projects near O'Hare to keep up with increased demand.

However, far-flung markets that have been prognosticated as benefiting from growth in the region—Dekalb and the I-39 Corridor—will continue to lag the submarkets located closer to Chicago, and there are still large amounts of land available for development in locations closer to the city.

This could also signal a need for in-city fulfillment centers, which would increase cost but greatly reduce delivery time.  We anticipate that leasing volume will remain strong and the smaller available supply will equate to higher rents, but this will encourage small- and mid-cap distributors to look for optimal space opportunities.

Not all retailers are going to push for same-day delivery on goods and not all consumers will pay the premium for that service. Trends show that consumers will pay for the convenience factor and there is nothing more convenient in retail than having the product as soon as possible.

What is true is the expansion of e-commerce regardless of if the product is delivered same-day or in three to four days. That latter is a lower-cost option, but it is still e-commerce requiring our country’s logistics hubs to move goods from the factory to the consumer. Chicago, one of the country’s Tier 1 distribution centers will remain a robust and vital industrial market.