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Tuesday, July 10, 2018

The Last Mile May Be Taking a Vertical Leap

By Rand Stephens (Houston)
The growth of e-commerce over the last ten years has exploded.  In 2008, less than 4% of national retail sales came from online ordering.  Today, the Census Bureau of the Department of Commerce reports nearly 10% of total retail sales is from e-commerce.  The first quarter 2018 e-commerce increased more than 16% from last year’s first quarter and there are no signs of slowing down as online giants like Amazon, Walmart and Target continue to thrive.  We are a click or a swipe away from ordering products and having them delivered within 24 hours, or in some cases, within two to four hours.  With consumer demand for instantaneous delivery on the rise and with people willing to pay more for the convenience, how will that impact last-mile distribution facilities?

Most industrial real estate is concentrated in distribution centers around heavily populated major metropolitan areas such as Atlanta, Chicago, Houston, New York City and Dallas.  E-commerce is primarily driven by a specific demographic of those populations – millennials.  Millennials have grown up in a world of instant gratification.  And now that they have aged and are earning a living, they can sit on their sofa, download a movie of their choice in a matter of seconds, while shopping for the latest fashion trends or groceries and have them in hand the next day.  Getting goods to this growing consumer base in the shortest amount of time is the challenge that supply chain logistics and the industrial market are now facing.

Georgetown Crossroads multi-level warehouse in south
Seattle opens later this year - Courtesy of Prologis
Land proximity to urban centers is limited and costly, but companies must get closer to their consumer base to ensure customer satisfaction and stay competitive.  Thinking outside the big-box warehouse model, Prologis developed an innovative solution – make it vertical. The 580,000-square-foot, three-level, first of its kind warehouse in the United States is set to open later this year just outside downtown Seattle. It will have ramps for truck access to second-floor loading docks and a freight elevator that will connect the third floor to ground floor loading docks.

Multistory warehouses are a new concept in the U.S, but they are common in Asia, Australia, Singapore and Japan.  Will this be a trend that we see more of in industrial markets across the country as delivery lead times are reduced to satisfy the “must have it now” economy?  Companies are already exploring tight urban spaces such as New York City and the San Francisco Bay Area for possible multistory warehouses.  However, the cost for these types of facilities comes at a high price – rental rates for the Prologis warehouse are as much as 50% higher than standard warehouse rates.

This may or may not be a trend coming to Houston any time soon.  However, the city currently has 20 warehouse buildings in the downtown area, with only one 15,000-square-foot space available, according to our research.  Last mile logistics and the innovative impact it will have on distribution warehouses will be interesting to watch over the near future.

 (Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

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