The View From E.CON: E-commerce Real Estate Evolves
By: Margarita Foster, editor-in-chief of Development as well as NAIOP’s vice president of knowledge and research
The world of e-commerce continues to change rapidly, with huge implications for commercial real estate.
ECONOMIC INCENTIVES, site selection criteria and key design elements were among the many topics discussed at NAIOP’s second annual E.CON — the E-commerce Conference. This year’s E.CON attracted 250 real estate professionals, who gathered in Atlanta on March 5 and 6 to hear about the latest trends in fulfillment centers — specialized warehouse/distribution facilities that primarily fill online orders — as well as the logistics and transportation elements of the ever-evolving e-commerce supply chain.
More than 20 speakers discussed build-to-suit and speculative projects, and explored the many ways that retailers are getting goods directly to consumers more quickly and cost effectively. The role of third-party logistics providers (3PLs), they noted, is only expected to grow, and the logistics network is in the midst of a phase-two buildout, as strategically located warehouse, sorting, fulfillment and hybrid structures are built out around the country.
Flexible Spec Buildings
Panelists at a session titled “If You Build It, Will They Come?” focused on the spec development of fulfillment centers (FCs) and the importance of flexibility in order to balance costs with must-have elements. They cited Central Pennsylvania, Baltimore, Houston, Dallas, Salt Lake City, and Northern and Southern California as the best markets for spec development of FCs.
Stan Conway, executive vice president of development for Majestic Realty Co., described key site selection criteria for FCs, including the following:
- The availability of economic incentives.
- Labor availability, including seasonal labor.
- Site access and road infrastructure capacity.
- Utility infrastructure (power availability and dual feed redundancy).
- The availability of “shovel-ready” land.
NAIOP Board of Directors and Executive Committee Member Jonathan Tratt, E.CON speaker Ben Conwell and NAIOP President and CEO Tom Bisacquino visit during E.CON.
As session moderator Lange Allen, executive director of U.S. industrial/logistics development for USAA Real Estate Company, noted, shovel-ready sites are particularly important because users don’t have time to wait. Once they select a location, they want the facility up and operating very quickly.
Jim Condon, chief development officer at Seefried Industrial Properties, focused on critical elements of site design, such as:
- Lower coverage ratios.
- More site flexibility for additional auto and trailer parking.
- Separation of autos and trucks.
- Auto parking near office areas.
- Multiple access points for autos.
- Truck queues.
A big issue in terms of layout and planning, Condon noted, is “how much elbow room to leave on the site for additional auto and trailer parking.” He cautioned that as flexibility increases, so do costs. Condon recommended that developers keep in mind the benefits of adjacent parcels. “[Do] you have a vacant site next to you where you can go spec on a big building, or [do] you have vacant land next to you that you can use for an e-com requirement if you need it? [Are there] pads … to provide expansion that can serve as additional auto parking?”
What are the “must-have” elements for a fulfillment center? Kevin Turpin, president of The Conlan Co., cited the following items:
- Additional sanitary sewer coverage for multiple, scattered restrooms.
- Foundation and structure upgrades to support mezzanines.
- Slab designs with fewer floor joints and a thicker slab for pick module loads.
- Building depths of 570 to 650 feet.
- Column spacing of 56 to 60 feet, lengthwise.
- A minimum clear height of 36 feet. (This seems to have become the standard, but developers should consider building to 40 feet.)
- Additional live load structural capacity to accommodate material handling and HVAC equipment.
- Additional glass flexibility for a higher percentage of office space than a traditional bulk use or multitenant structure.
- Skylights or clerestory windows to provide natural light for employees.
- Better roof insulation; developers should consider insulating with a higher R value for future conditioned space.
Turpin also presented the “Clear Height Decisions” table, which illustrates changes in costs per square foot for structures with different clear heights and building widths.
Discussing the retrofitting of existing spec buildings, Turpin cautioned that reinforcing a foundation after the fact is cumbersome and quite expensive. He said that “loads are an especially challenging issue, [so] we are now going with six inches of stone and reinforced heavy pavement.” Allen followed up, saying “pull that lever today, or build that repair into your pro forma.”
According to Ben Conwell, former director of real estate for Amazon.com, the e-commerce giant processes returns differently in Europe than in the U.S. Some European fulfillment centers have return components, but that has not been the case in the U.S. “Today, when you order from Amazon, [the item] probably has a Las Vegas return address, because that is a dedicated return center within the Amazon network.”
That facility does not have the intensive conveyor systems nor the volume of inbound goods typically seen at an FC. The return facility does not require the same level of power needed at a “fully souped-up FC,” but it still needs a lot of manpower. Inspecting and processing returned goods is an intensive process, so this is still a customized building, but it is more like a “plain vanilla” warehouse than a specialized FC, noted Conwell, who now leads Cushman & Wakefield’s e-commerce and electronic fulfillment specialty practice group.
Turpin added that most of the designs he has seen for FCs that handle returns have two to four inbound doors (compared to 150 to 200 outbound doors), adjacent to about 10,000 to 15,000 square feet of space dedicated to processing returns.
Keynote speaker Robert Zelis, vice president, supply chain, for Sam’s Club.com, which is part of Wal-Mart eCommerce, kicked off NAIOP’s second E.CON conference.
Site and Building Selection Criteria
Moderator K.C. Conway, senior vice president of credit risk management with SunTrust Bank, kicked off a session titled “Key Drivers for E-commerce Site and Building Selection,” sharing a theory concerning changes to the supply chain: “I use the term ‘freightways’ when I look at e-commerce and everything that is happening in our supply chain today. We need to think broader, beyond just the port or highway systems or rail or intermodal.”
Commercial real estate practitioners, Conway added, need to look holistically at the entire freight corridor, from FCs to FedEx and UPS locations, and consider how all of this should be integrated.
“My hypothesis is that this is moving from a West Coast-centric model to an East Coast-centric model,” he said. Why? Because 70 percent of the U.S. population is east of the Mississippi River, and East Coast ports that once served primarily military needs are now “big, modern commercial ports that connect really well with our rail corridors.” Conway cited the ports in Norfolk, Jacksonville and Charleston as examples. He supported his theory by illustrating that “most of our rail connections move through the Southeastern U.S., so this is accelerating what will change in our supply chain.”
Jim Condon, chief development officer, Seefried Industrial Properties; Stan Conway, executive vice president of development, Majestic Realty Co.; and Kevin Turpin, president, The Conlan Co., discussed speculative development of fulfillment centers on a panel titled “If You Build It, Will They Come?”
How will warehouse and FC real estate be organized in the future? Scott Belfer, a CBRE senior vice president who leads the company’s e-commerce specialty practice group, said that the first phase involved building mega e-commerce fulfillment facilities of 750,000 square feet or larger. The next phase, which is starting to unfold now, will involve smaller, strategically located facilities that vary in size from 30,000 to 200,000 square feet and house a variety of functions, including warehousing, sorting and fulfillment.
Mike Mullis, senior vice president for real estate with J.M Mullis Inc., noted that not all retailers and 3PL providers separate fulfillment and warehouse components; he could not recall building a dedicated FC. “Most of our clients are using a portion of their building to do e-commerce,” he said.
Mullis added that the location decision for most of his clients has been driven by labor, and “not only … the initial ramp up … but the ability to get … seasonal labor. There are certain pockets around the country where you have that ability, and that seems, at least in the last three or four years, to be driving the location decision.”
Mullis also noted that many of his clients fulfill e-commerce orders from their warehouses rather than maintaining dedicated FCs, because of concerns about dual inventories: “It can become cost prohibitive for them to have two separate buildings with the same inventory trying to serve the same function.”
K.C. Conway, senior vice president, SunTrust Bank; Scott Belfer, senior vice president, CBRE; Michael Mullis, senior vice president, J. M. Mullis Inc.; Hugh Williams, principal, Avison Young; and Amy Gerber, executive vice president, JLL, addressed key drivers for e-commerce site and building selection.
Amy Gerber, an executive vice president with JLL’s business and economic incentives practice, focused on economic incentives available to developers and companies building and operating labor-intensive fulfillment centers. Emphasizing the importance of the labor component, Gerber said, “we don’t get involved on site selection until we know that we have the labor market covered.”
She added that a recent FC project that promised 1,500 jobs and capital expenditure of $100 million benefited from a $6.7 million state grant. “These are big numbers if you can site the facility in a state and community wiling to partner on that. The $6 million will go directly toward material handling costs” for the project.
She mentioned that FCs, which are more expensive to build than typical warehouse distribution facilities, result in higher-value assets for municipalities, increasing their tax base, another element that should be emphasized during negotiations with state and local officials. “Their tax base goes up, so you have an easier time negotiating property tax relief.”
Another economic development incentive she described involved an e-commerce facility that was given $2.5 million in community development block grant (CDBG) funds from the U.S. Department of Housing and Urban Development (HUD) to add a rail spur. “Once we take that cost off of the developer’s plate, the location [becomes] attractive.” In addition, the U.S. Department of Transportation (DOT) provided a grant to install an access road. “Without that, this is an extra burden on the company’s P&L [profit and loss] and the developer’s P&L.”
A session titled “Drones, Lasers and Driverless Vehicles: The Last Mile Delivery” featured Bala Ganesh, director of marketing, UPS; Mark Magill, vice president of business development, OnTrac; and Everett Steele, CEO, Kanga.
Panelists at a session titled “Drones, Lasers and Driverless Vehicles: The Last Mile Delivery” discussed delivery times and methods. Bala Ganesh, director of marketing for UPS’s retail segment marketing team, described same-day delivery as a “niche product,” noting that, based on UPS surveys, people are not willing to pay for it, but that situation “may evolve or change in the future.”
Ganesh also offered some practical suggestions for mall owners and operators. Commenting on the notion of e-commerce fulfillment from brick-and-mortar stores, he said that most small retailers cannot afford to build separate fulfillment areas within their spaces and suggested that mall operators create “pick-and-pack” facilities to be shared by smaller retailers. He also suggested that mall operators take the following steps:
- Focus on enabling people to pick up and drop off items efficiently.
- Make loading and delivery docks bigger and easier to use, and connect them to all stores.
- Create mall entrances that enable trucks to pick up packages from the mall to be delivered directly to consumers.
- Create customer pickup and return centers to generate more foot traffic.
Regarding consumer pickup of items ordered online, Everett Steele, CEO of Kanga, an on-demand delivery service, said that a retail center is a better distribution hub for consumers than a warehouse. Retail centers can fulfill e-commerce orders while also driving in-store purchases, secondary purchases and impulse buys.
Michael Landsburg, vice president of real estate for NFI, a 3PL specializing in the shipment of oversized items, sounded the alarm regarding the issue of truck driver shortages, which was echoed by several other speakers. Landsburg said that the average age of his company’s driver pool is 51 and, sadly, the average age of death for truck drivers is just 58. He noted that key challenges include finding land for truck drivers’ facilities that allow for easier access and queueing as well as amenities such as driver lounges. These facilities must be upgraded, he added, to retain and attract drivers.
Conference organizer and session moderator Curtis Spencer, president of IMS Worldwide, posed the conference’s final question, asking panelists: “As users, tell this audience what you really need that you are not seeing today.”
“More money, please,” was Landsburg’s response. He said that costs will be a big challenge for those on both sides of the table, as parties work through ways to find funding to build out mezzanines, conveyor and automation systems and more. He added that the specialized nature of these systems means they are likely to change in five to 10 years. Finding ways to fund those improvements may result in better tenant retention.
Hadi Irvani, founder of Peachtree, a fresh food delivery service, said there is a big need for spec cold storage. “With e-commerce growing and food growing, we are at the beginning stages of a revolution in how food is being distributed. … Food is at the tip of the iceberg of starting to be shipped directly to the consumer.”
The Promise of E-commerce
As e-commerce sales continue their robust growth, manufacturers, transportation providers, distribution and fulfillment center operators and retailers all are being pressured to modify the retail logistics chain. To meet customer expectations, retailers must have merchandise available on shelves for in-store purchases as well as in distribution centers for delivery directly to customers. Retailers also need to ensure that their deliveries — both to stores and directly to customers — are predictable and remain cost effective.
“The Promise of E-commerce: Impacts on Retail and Industrial Real Estate,” a new white paper by Curtis D. Spencer and Steve Schellenberg, president and vice president of IMS Worldwide, published by the NAIOP Research Foundation, explores these topics and more.
Spencer and Schellenberg focus on the evolution of e-commerce logistics as well as the global growth of e-commerce, both of which “have important implications for the types of retail and industrial real estate that will be in demand in the future as well as the optimal sizes and locations of those properties.” They examine the many ways that retailers are attempting to meet evolving customer expectations: Some are directly developing and operating their own technology platforms, logistics and distribution facilities. Some are outsourcing all of these functions. Others are taking a hybrid approach, keeping some tasks in house and outsourcing others.
The authors also address how e-commerce retailers distribute goods through fulfillment centers and warehouses; how proximity of the fulfillment center to the customer is becoming critical, as next-day and even same-day delivery becomes more important to customers and retailers; how brick-and-mortar stores are also serving as fulfillment centers; and how these changes are affecting demand for industrial space. They explore how the e-commerce sector is continuing to grow and evolve, as well as how “the new promises being made by retailers to their customers will continue to impact retail and industrial real estate and investment and development.”
For more information:
“The Promise of E-commerce: Impacts on Retail and Industrial Real Estate,” Curtis D. Spencer and Steve Schellenberg, NAIOP Research Foundation, March 2015.