LOS ANGELES—Big-box distribution centers have been riding such a sustained wave of demand for so long that it's legitimate to begin wondering when that wave might break, or at very least crest. For the time being, though, that eventuality isn't on the horizon, Colliers International says in its latest report on the sector.
“It's been over the past decade that they've really sprung up in core regional markets like Chicago, the Inland Empire, Dallas, Northern and Central New Jersey and Eastern Pennsylvania, etc.,” Dwight Hotchkiss, president, broker services | USA & national director, industrial | USA, tells GlobeSt.com. “They've been doing that to quench the demand both from e-commerce and from the workforce that has been acquiring more goods as the economy has improved.
“And while initially the demand has been in the core markets, as there has been more attention paid to 'first-mile' and 'last mile' and speed of delivery, in the past few years we've been seeing significant growth in secondary markets, especially near large population centers or logistics hubs, like seaports, inland ports and air cargo ports,” he adds. “Occupiers are moving into these markets at an accelerated pace, and it's all about speed to consumer.”
Last year was one for the record books as far as the big-box sector was concerned, with all-time records set for every metric that Colliers tracks. And while maintaining that kind of momentum looks like a tall order, “Leasing and net absorption for the first half of 2017 are near the pace we saw during the same period in 2016,” says Hotchkiss. In fact, big-box vacancies hit a new low of 6.2% at the end of this year's second quarter, even as the construction pipeline reached new levels of volume.
Activity continues to be dominated by Amazon.com, which leased five buildings totaling 4.1 million square feet during the first half of '17 in the 14 markets highlighted in Colliers' new report, which for the first time covers secondary markets such as Cincinnati and the East Bay region along with the heavy hitters. “With all that has gone on with e-commerce and the renaissance of retail to industrial, I think you're going to see that continue,” Hotchkiss says.
“If the economy slows, you will see less demand from some of these firms, but there are so many that have yet to build out their strategies,” he adds. “Our three supply chain and logistics consultants have been so busy in meeting with clients, who are thirsting for strategy on where they should be in terms of site selection, that we see a large pipeline ahead.”
Given that, Hotchkiss points out, “there are still headwinds to look out for. There's been increased demand for smaller warehouses close to urban centers, which could peck away a little at the demand for big-box. There's a trend of lean warehousing on the rise with occupiers: leasing multiple buildings of 50,000 to 200,00 square feet versus one big box,” in order to focus on particular products and increase delivery speed to the end consumer.
Even so, Colliers sees plenty of momentum left in the big-box wave. “The North American economies remain strong, e-commerce continues to grow at a faster rate than traditional in-store retail and ports throughout North America continue to post growing inbound container volumes,” the report states. “These drivers should outweigh the headwinds and create strong demand and rental rate growth in big-box markets for the foreseeable future.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
