CHICAGO—The rise of e-commerce has created the demand for a vast amount of new industrial space, but it has also introduced a level of unpredictability not seen in past booms, RealShare Industrial panelists in Chicago said yesterday. Speakers at a morning panel moderated by Ronan Remandaban, co-founder and chief executive officer of Liquideed, discussed how the need for “Last Mile” distribution centers had transformed the sector, especially in dense urban areas, and how developers and brokers should navigate this new landscape. But there were no easy answers.
“This sector is evolving on Internet time, not regular time,” said Geoffrey Kasselman, executive managing director, national industrial practice, Newmark Knight Frank. And the creation of a whole new world of distribution centers, for which there is no existing model, means users will experiment. Essentially, they are throwing everything against the wall, and seeing what sticks.
As a result, developers and brokers have to keep an open mind and prepare to do unprecedented things. Matt Goode, principal, Venture One Real Estate, which recently broke ground on a 1.1 million square foot spec project in suburban Channahon, said his firm also recently bought a building in the Humboldt Park neighborhood of Chicago, a mostly residential area largely ignored by industrial developers. “We would have never looked at this building seven years ago.”
Kevin D. Matzke, managing principal, Clarius Partners, agreed with Goode that developers should target infill sites near urban cores, as many users are now more concerned with time to market and no longer want peripheral greenfield sites. But he added that e-commerce, though important, is not the sole factor driving this demand.
Consumer demand for variety has helped make food companies the second biggest user of last mile facilities, he said. Although national grocers typically reserve a sizable majority of their shelf space for same set of predictable products, a growing portion is reserved for an ever-shifting array of items that go in and out of fashion. “They don't know what the demand for these is going to be week-to-week,” and distributors need to be able to respond quickly.
As reported in GlobeSt.com, Clarius has renovated structures for distribution use in Chicago's Pilsen neighborhood, a working-class area just southwest of downtown, and attracted food companies that were displaced by the transformation of Fulton Market into a high-end office market. Dubbed Pilsen Park Chicago, it includes a $45 million, 227,000 square foot freezer cooler building, and a 166,000 square foot distribution center.
Goode added that the internet has indirectly boosted demand from service providers for similar urban infill spaces. In the past, many of these businesses wanted retail-like spaces that provided some street presence and free advertising. But with the internet they can advertise all they want, and more industrial-like spaces off the beaten path now look preferable.
“We are seeing increased developer interest in some of the more challenging infill sites,” says a mid-year report from JLL. “Nearly 400,000 square feet of new product was delivered in South Chicago thus far in 2017.”
Mark Nelson, principal at NelsonHill, which also worked with Clarius to market Pilsen Park, said that even though demand for new space is intense in neighborhoods close to downtown, about six to eight miles out it drops off. But as e-commerce is all about delivering products quickly to people wherever they live, it may eventually fuel demand for facilities in a broader geographic area.
That's one of the big unknowns. And Matzke said there are others. Labor remains one of the biggest costs for distributors, and there has been chatter about possibly automating the work. However, no one has figured out a way to do that. But if it happens, “it will change the market overnight.”
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Sule Aygoren
Aygoren oversees the editorial direction and content for ALM’s Real Estate Media Group, including Real Estate Forum and GlobeSt.com. In her tenure with ALM, she’s held roles of increasing responsibility, including Managing Editor. Aygoren has received several awards for her coverage including Best Trade Magazine Report from the National Association of Real Estate Editors and the James D. Carper Award for Young Journalists. Under her direction, Forum has received four national NAREE awards for Best Commercial Real Estate Trade Magazine.
