The last few years have shown a boom in e-commerce and, with it, logistic warehouse construction. The 2020 pandemic lockdowns accelerated the growth of e-commerce, and sales increased by 43 percent between 2019 and 2020, according to The Annual Retail Trade Survey, a program of the US Census that produces industry-level estimates of cash flow for the retail sector in the U.S. each year. In fact, the early months of the pandemic showed a growth equivalent to 10 years in only 3 months, according to a McKinsey report. Although a “return to normalcy” has brought e-commerce back from its peak in 2020, in the third quarter of 2021, online sales have leveled off at 30 percent above pre-COVID levels.
The early 2010s saw the rise of e-commerce: big box distribution centers and double-loaded mega warehouses were the trends. Amazon alone spent $14 billion between 2010 and 2013. Consumer purchasing increased steadily, with growth peaking in the first quarter of 2020 during the harshest period of the pandemic. Customers are purchasing more and more online, but now at a slower rate, we will probably see continued slow growth of online consumption in 2023.
The looming recession, expected to hit late 2023 and early 2024, is not cooling construction plans quite yet. Taylor Odegard, CEO of NavigatorCRE, a commercial real estate data analytics company, explains, “tenant rates are still high in demand, the U.S. industrial market is probably close to 95 percent or more occupied.” The vacancy rate, which was 5 percent in 2020, dropped to around three or low four percent towards the end of last year. So despite the projected slowdown, these warehouses are staying occupied. Retailers are focused on meeting customer demand despite the supply chain issues that continually crop up. They are tackling this with bigger warehouses and smarter designs.
The new normal vs. the old expectations
Amazon introduced 2-day shipping as a part of its Prime service in 2005, and people had come to rely on it for 15 years. Customers found themselves experiencing delays during the height of the pandemic and accepted it as a temporary change. But now that things are returning to normal, many customers are expecting delivery times to come back down. People who haven’t gotten their orders in the promised time have even started suing Amazon. And some consumers are even finding themselves frustrated with out-of-stock products and simply abandoning their carts and driving to physical brick-and-mortar stores. In 2022, 56 percent of all abandoned carts were the result of shipping concerns.
Consumers are getting less and less patient with e-commerce, and that might push people away from it. “Fulfilment is also a feeling,” Odegard said. When companies don’t deliver on their shipping expectations, customers’ bad feelings become canceled Prime accounts and less business in the future. E-retailers understand the need for speed, and to that end, maintaining stock is crucial to keep customers coming back.
Maintaining a steady flow of goods to customers in the midst of ongoing supply chain issues is tricky. To do so, logistic warehouses are being developed around the country, and they are being designed to be bigger and smarter.
Better logistics for faster shipping
Two often-confused terms, which are sometimes used interchangeably, are “distribution center” and “fulfillment center.” A distribution center can be a transportation hub, or it can be a place where wholesalers transfer goods to retailers. Meanwhile, a fulfillment center holds products before delivery to consumers. Usually, fulfillment centers are close to the consumer, and distribution centers are in major transportation areas.
In California’s Inland Empire, where residential homes are being torn down to make way for warehouses, a new type of fulfillment center is being tested. In 2022, Prologis completed the biggest warehouse in the world, in Ontario, for Amazon. At 4.1 million square feet, the Merrill Commerce Center is 7 miles from Ontario International Airport and 46 miles from Los Angeles. Although the area has more available land at a much cheaper price than Los Angeles, the building has a smaller footprint than one might expect. Whereas warehouses have historically been built large horizontally with only one level of the warehouse floor, Merrill Center is 5 stories high. Companies are “solving for the cube,” Odegard explains, building taller buildings with multi-level truck access that have a smaller horizontal footprint. This becomes crucial as you build closer to the big city and real estate comes at a premium.
New York’s largest new fulfillment center, backed by Turnbridge Equity, is the Bronx Logistics Center, slated for completion this year with leases to begin August 2023. This will be the largest industrial development in New York City and will similarly be built vertically. Its location is just only a couple of miles from downtown Manhattan, with easy access to highways and train connections. It is also 5 stories tall with two levels for truck loading. Its delivery area will primarily include Manhattan, Queens, and Brooklyn.
While the Merrill Commerce Center is singularly owned by Amazon, the Bronx Logistics Center was built on spec and is now brokering deals with tenants. This is another new trend: warehouses are designed to accommodate multiple tenants simultaneously. The vertical split allows tenants to access two levels. As Odegard explains, “from an investment standpoint, having a 40,000 square foot warehouse with four tenants paying market rent is a fairly accretive and well sought-after asset.” It minimizes risks, allows tenants to grow or shrink, and buttresses the owner against uncertain economic conditions. If one of the tenants can no longer pay rent, the building can still create cash flow.
Tenants will have separate loading docks and offices, so they can maintain autonomy within the space. 569,000 square feet of the Bronx location has been leased to Amazon, a departure from their usual move of purchasing. Of course, for a brand-new building with a reach of 8.5 million people, this is probably a good call.
2023 should be a year of warehouse construction done smarter. Post-pandemic customers want to get back to normal. Although the growth of e-commerce is dropping, people still have standards, they want the same reliable 2-day shipping they relied upon in the 2010s. E-retailers can accommodate them with new facilities, including taller, more cubic buildings in the final mile of major market centers. Meanwhile, we could also see even bigger distribution centers farther out from major population centers, acting as hubs between the wholesalers and the manufacturers on one side and the distribution centers closer to the consumer.