A Steam Train With No End In Sight
Aviva is the Managing Broker of Sonenreich & Co, a third-generation commercial real estate broker, owner and investor in Denver, Colorado.
America’s warehouse space demand is marching toward a better future. Buoyed by the acceleration of e-commerce, warehousing today sees more growth opportunities than perhaps ever before, and this is no hyperbole. Data backs it up. U.S. retail e-commerce sales are estimated at $209.5 billion for the third quarter of 2020. That’s an increase of 36.7% from the third quarter of 2019.
A continued rise in e-commerce means a strong commercial real estate position, with modern warehouses being the focal point of the warehouse space demand. As retailers continue to add more inventory to meet the e-commerce growth, they need to increase distribution center footprints across the country. Many manufacturers are also keen on diversifying their supply chains, which means more opportunities for third-party logistics (3PLs) companies. This, together with the pressure on retailers and wholesalers to reach more and more consumers, is driving warehousing growth like never before.
According to CBRE Research, $1 billion in incremental e-commerce sales result in 1.25 million square feet of warehouse space demand. Consequently, net absorption is estimated to reach over 250 million square feet in 2021. It’s interesting to note that this figure far exceeds the previous five-year annual average of 211 million square feet.
Add to this the growing infill warehouse space demand in urban cores, and you are sure to understand the projected record-high levels of new warehouse construction. However, land constraints and high costs may be construed as a limiting factor here. This takes us to the fact that retail buildings are expected to see a surge in adaptive reuse for industrial occupiers in the next couple of years. The fact is that America has far overbuilt retail space. This is why it seems like you see “for lease” signs everywhere. Adaptive reuse allows developers to take a building that no longer serves the community and alter it into a higher and better use. For example, your local big-box retail property that has sat vacant for the last five years could become a warehouse for shipping and logistics.
On the other hand, an unprecedented increase in e-commerce fulfillment hints at the requirement for new design features. From ceiling heights to mezzanine floors, several considerations have to be factored in if the warehousing industry aims to boost net absorption totals in the foreseeable future. Automation is a rolling steam train that goes hand in hand with warehousing. Taller ceiling heights allow for more automated features. With that, location plays a large role in this as well. Companies find it more cost-efficient to have warehouses outside of city boundaries where they might need to pay a toll fee instead of sitting in traffic in the inner city.
Inventory control also needs focus as occupiers plan to avoid supply chain disruptions, intending to deviate supply sources from Asia. Then, there is also an increased need for technology and sustainability. To this end, the industry needs significant investment in machinery, technology and AI. The sad reality of the situation is that a machine is more reliable than a human. A machine won’t skip work. A machine won’t steal from the company.
Keeping the challenges of new building features, inventory control and tech trends aside, there’s no denying that industrial demand from occupiers and investors will remain robust in the years to come. And from my vantage point on the ground here, Denver can capitalize on this demand. The metro’s central location and its friendly yet diverse business climate make it a viable market for e-commerce companies, distributors, occupiers and national investors alike. Apart from the east-west corridor, the relatively underutilized north-south corridor and the farthest west corridor can soon become the hot spots for new warehouse development. In one of the most tumultuous times in world history, the warehousing industry is progressing. Denver, with its robust industrial development and growing population, can be the preferred last-mile industrial market.
As distribution and e-commerce users continue to take full advantage of online shopping, the prevailing positive net absorption is projected to grow in 2021. And we must expect the same surge from here on.
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