E-commerce: The undeniable x-factor in growth of industrial demand

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This article originally appeared in The New England Investor.

Ask yourself this? Can you identify a month, or even a week, over the last two years when you have not had a package arrive at your doorstep thanks to online shopping? We’re guessing the answer is no for you and for most Americans. This is the world we live in now and it’s driving significant growth within the logistics and supply chain industry.

“Retail’s loss is industrial’s gain,” said JLL Managing Director Frank Petz. “Distribution centers are replacing many retail stores, creating somewhat of a zero-sum game. At the same time, urbanization is driving more people into cities, where they’re no longer going into stores or malls, instead, getting what they need delivered right to their doorsteps.”

You don’t have to look much further than the fact that 30 to 40 percent of “big box” industrial real estate demand today has a direct correlation to e-commerce to see this growing trend.

“The market is very strong right now,” said Rick Schuhwerk, Managing Director of JLL’s New England Industrial Brokerage Group. “We’re living in a world of e-commerce that is only going to get better. If you think that right now only 9% of total retail sales are online, imagine where we’re headed in the future. More product is going to be shipping direct from the warehouse which is only going to increase demand for more distribution centers in major cities like Boston.”

As a result, Boston, which was once considered an “end-of-the-road” distribution market, is now a place that investors and tenants alike want—and need—to be.

“We’ve seen investor demand shift over the last three years but it’s really picked up in the last 18 months,” said Petz. “Capital is flowing into the space and some of the largest commercial real estate portfolio transactions across the globe have been industrial. Here in Greater Boston, it started with local investors sensing the groundswell of demand, and then it caught the attention of the big boys. The institutional capital gravitated first to the large big box Class A product type and now we’re seeing it in Class B and in Flex product as well.”

“With just shy of 115 million square feet, we’re a small market compared to the rest of the country,” said Schuhwerk. “In the past, there were fewer compelling reason to have a big distribution center in Greater Boston. Now, because the city is thriving and is so heavily populated particularly with students & tech savvy consumers, the product has to be as close to the people as possible, making Boston more desirable for e-commerce and third-party logistics companies.”

This “e-commerce effect” has resulted in more than three million square feet of absorption over the last 24 months. Amazon alone has accounted for nearly 1.6 million square feet and is reported to still need that amount, while others like leading online retailer Wayfair, along with Restoration Hardware, the Potpourri Group and more have all contributed to this growing trend. That wasn’t the case many years ago, when the likes of Procter & Gamble, General Motors, Kraft, Anheuser-Busch, Reebok, Trader Joe’s and others vacated the market to the tune of more than two million square feet. But that was back before the recent e-commerce revolution, which has helped to catapult Greater Boston back on the radar screen.

“Boston has become one long last mile,” says Petz. “Between the density of Boston, the high utilization of e-commerce per capita, and the limited availability of quality industrial space in this market, industrial product that runs out to I-495 has become as valuable as last-mile product.”

Across the region, average asking rents have reached over $6.75 while vacancy has dropped to a 10-year low of just 6.6 percent after reaching as high as 18 percent just five years ago. And, when looking at Class A warehouse space, vacancy is down to just 5.0 percent. Meanwhile, across the U.S., industrial sales volumes are up nearly 35 percent despite total sales volumes being down more than 13 percent.

“Industrial product is no longer considered as down and dirty as it once was,” added Petz. “It’s become a highly glamorized, and highly sought after asset.”

This article originally appeared in The New England Investor.

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