If the space fits
Shippers more closely scrutinize properties and buildings for distribution.
In the years leading up to the recession of 2009, many shippers snapped up smaller, cheap distribution centers wherever they could, banking on good times ahead.
Since the downturn, these same companies have taken a more strategic look at their distribution space, considering how a certain facility fits into their larger supply chain picture before they buy or lease. Instead of looking for many small properties spread across a given region, they’re consolidating into larger buildings in high-traffic areas.
According to Brian McKiernan, senior vice president of business development at CenterPoint Properties, shippers moving into these bigger spaces have taken advantage of the slow economy. Interest rates are low and traditionally more expensive facilities now cost much less in the current economy. Additionally, shippers can take more time to think about where they ultimately want to be located.
The facilities popular in the down market, he said, are more functional spaces that better suit a shipper’s operational needs. “Now people are saying, ‘We don’t need to be in five buildings; let’s be in one really functional building,’” McKiernan said.
Generally, these types of spaces are located in traditional distribution hotspots like Los Angeles, Chicago and in large cities of the Northeast, but a company’s inbound international business also plays a factor in where to build, or lease, a new location.
“Coming out of the recession, people are looking to make more long-term, strategic, better functional plays,” McKiernan said.
He also noted second-tier logistics hubs like Atlanta and Dallas have experienced a lot more activity in terms of distribution centers. He explained this as shippers simply filling in supply chain holes.
Before the recession, shippers concentrated on building hubs in the top-tier transportation cities — he said the average facility size in these markets ranges from 400,000 to 500,000 square feet — and now companies are returning to other markets to address needs that simply weren’t important enough to serve more directly when the economy was booming.
Home Depot, for example, just finished its supply-chain revamp, adding rapid-deployment centers and stock distribution centers around the country, and Amazon is currently rolling out its new distribution strategy.
Clients with requirements for spaces larger than 1 million square feet tend to be retailers attempting to meet new e-commerce business demands and embrace campus-style facilities, McKiernan said.
CenterPoint continues to invest in distribution space in key markets close to ports and other transportation access points. The firm is currently working on projects near the Port of Houston and redeveloping outdated properties in Los Angeles to make them desirable to tenants in the current market. Near the Port of Charleston, CenterPoint is developing a facility for BMW that will handle about 60,000-80,000 containers per year.
McKiernan warned this trend toward more functional, centralized locations might evaporate once the economy picks up. He hopes shippers will continue to take a long-term view of their supply chain needs, but said it also makes sense that firms would buy up property as it became available if their business started growing quickly.
“It wouldn’t shock me if that, when the economy gets good and guys need more space, they just grab more space,” he said. “When business is good, people probably don’t take the time to sit down and be as strategic as they should be.”
For shippers who know they will need to be in a certain location — say, for example, Southern California — McKiernan suggested they take time to find the right property to suit their needs. Thinking of a real estate transaction as a long-term investment will ultimately help establish a robust and more efficient supply chain, he said.
Freight costs continue to rise, and this historically leads clients to pursue many smaller distribution centers than a few large facilities. But Richard Thompson, a managing director in Jones Lang LaSalle’s supply chain and logistics solutions division, has seen a different trend.
“Regardless of where oil costs go, everybody is of the opinion that freight costs are going to continue to escalate,” he said. “That drives this notion you want to have more smaller than fewer larger (facilities). But we’re seeing completely the opposite.”
As with McKiernan, Thompson has witnessed demand for “big box” distribution centers spanning more than 400,000 square feet, and companies who have a presence in strategic markets have started trading up to those larger facilities.
“A lot of our clients were taking advantage of the down economy to reevaluate their networks and start to position themselves for the future when the economy did turn,” he said, noting the trade-up to larger spaces has been opportunity-driven due to the sluggish economy.
He predicted as the economy gets better, companies will return to an approach of having more facilities that are smaller to lower their transportation costs.
In the current market, JLL’s most active clients are big-box retailers like Amazon and Walmart, companies that are picking up massive facilities to meet growing online needs. According to Bloomberg, Amazon spent nearly $14 billion on distribution in the past three years, adding 50 locations to its footprint. Five more are on tap this year. The food and beverage industry has also been active in the distribution market, as have third party logistics services providers, Thompson said.
Retailers, in particular, want to be close to their consumer base, but can’t penetrate as far into cities as they might like, Thompson has found. For one thing, there just isn’t available land in the inner cities for a build-to-suit, 2-million-square-foot facility, he said.
Shippers also need to choose the right location for staffing and access purposes.
“Dedicated e-commerce facilities require a lot of labor, a lot of parking and accessibility to that labor,” he said. “We’re seeing that influence the location of those facilities.”
Where McKiernan saw a mix between leasing and new developments in most industries, Thompson said a retailer’s e-commerce facility needs to be a new development because of the specific requirements of the client.
The time to take advantage of these trends in the distribution center market has mostly passed, but Thompson said there is still time for shippers to take a closer look at their supply chains and snap up cheap property.
“Even though the market is stabilized and the industrial real estate market is starting to recover from where it had been several years ago, there’s still opportunities to jump in,” he said.
Shippers can also use the current market to make upgrades to facilities in long-term transportation hubs, Thompson added.
“You’re always going to be in Chicago; you’re always going to be in the Northeast; you’re always going to be in California,” he said. “There are certain markets that are always going to be in play and won’t be in flux.”
Trading up and consolidation of facilities, Thompson said, isn’t likely to change domestic transportation much or force many adaptations to a shipper’s supply chain. As an example, he said the transportation model wouldn’t change for a shipper moving three smaller facilities in Southern California to a single larger space. But if a shipper had smaller warehouses in Dallas and elsewhere in California that were combined into a larger development, in Phoenix for example, some rejiggering of the shipper’s transportation will need to be done, he said.
CEVA’s Terry Haber, who in August was promoted to senior vice president for solutions design in North America, said distribution activity is picking back up, but clients are still tiptoeing into the current market. Shippers are generally looking for more flexible space — in some cases, this means smaller space — but every client is different, Haber said. One thing they all share, though, is a reluctance to expose themselves to any situations that might make them vulnerable to economic machinations.
“They’re being a little more risk-averse in terms of signing those longer-term commitments,” he said.
Zeroing in on a specific industry, Haber said he’s seen rapid footprint expansions in the consumer electronics space, with Microsoft and Dell looking to expand to bigger facilities. Sometimes this facility doesn’t have to be a dedicated distribution center; clients could instead look toward a shared space, he said.
Unlike the others, Haber has already seen a move toward smaller, regional centers. This drives down transportation costs for firms, which can make up for the added costs of moving into multiple spaces. Added real estate cost can also be made up through increased volume.
Haber said shippers should consider both inbound and outbound costs, facility-operating costs, and inventory-carrying costs when selecting a site.
When shippers look at their supply chains, he said, they need to realize that the market will always be somewhat volatile. Long-term decisions about distribution centers can pay off for shippers, but companies that commit themselves to new centers for too long leave themselves vulnerable to the whimsy of the market.
“You’re constantly resizing your strategy based on how the economy’s doing, based on how the competition for a particular customer is doing. It tends to be that industries and companies will take a position on the distribution strategy and it lasts about five years. After five years, enough has changed that you need to reevaluate it and tweak it or make a major overhaul to it,” he said.
“You don’t often see a 10-year decision anymore, because that’s an eternity,” Haber added.