Same-day delivery from major e-commerce and multichannel retailers during the 2012 holiday season introduced e-commerce as a viable option, even for last-minute shoppers. This evolution in customer demand now ripples through the supply chain for all retailers, prompting executives to re-evaluate real estate strategies, according to a new report from Jones Lang LaSalle (JLL).
“Retailers are anxious to create effective multichannel strategies that cater to new customer expectations, such as same-day delivery as well as e-and m-commerce,” said Kris Bjorson, head of JLL’s Retail/E-commerce Distribution group. “This means revaluating their supply chain networks and distribution models down to one of the most important components, their distributions centers.”
JLL’s Big Box Outlook report chronicles the transformation of the warehouse and distribution facilities referred to as “big boxes,” (those exceeding 250,000 square feet) that form the backbone of the supply chain. Multichannel retailers demand changes to these facilities to better support order fulfilment, including more picking and packing tasks that mean more employees are needed at each site.
“Multichannel retailers must first articulate their service commitment; then align all their real estate decisions,” said Rich Thompson, head of the JLL’s Supply Chain and Logistics Solutions group. “Location of ‘big box” facilities can make or break a retailer or an e-commerce company’s abilities to deliver their service commitments—especially same-day, or other ambitious delivery schedules.”
“Retailers grapple with three alternatives, all with strategic real estate implications,” continues Bjorson. “Should they outsource individual order e-fulfillment operations to other companies? Should they build a dedicated e-commerce facility to fulfill such orders? Or, should they have a multichannel distribution center that fulfills both individual and store orders?”
As retailers ponder these questions, potential solutions could reshape distribution centers in multiple ways.
Here's What's Needed
• Mezzanine areas are multiplying. E-commerce companies need larger mezzanine areas—requiring higher clearance from 36’ to 40’. New buildings can typically accommodate two or even three levels of mezzanine for picking, packaging, gift wrapping, returns and other back-office tasks.
• More employees need parking. Many e-commerce companies employ labor-intensive picking and packing strategies to fill online orders, thus requiring larger sites to accommodate employee parking.
• Consumer-driven location selection. Demand plays a larger role in site selection when goods must arrive on quick turnaround. There must be an available and affordable labor force to staff distribution centers, as well as access to rail, highways and air transportation.
• Life system and HVAC requirements increase. With an increased warehouse workforce, other upgrades are necessary to building life systems, such as better lighting and ESFR fire protection. Formerly driven by inventory, now heating and cooling systems must be employee-driven.
“In addition to up-front capital costs in the facility itself, retailers have to plan for other ongoing costs associated with increasing automation, such as investments in material handling systems, conveyor sortation and controls, warehouse and inventory management software, and picking/packing technology,” says Bjorson.
Big Boxes = Big Market for Investment
Alone or combined, these building criteria may limit the search for space to only a few existing opportunities, or drive retailers to require customized build-to-suit developments. As a result, build-to-suit development is rising and large corporate retailers continue acquiring significant space.
This strong demand is also hindered by several years without speculative construction that has driven up the cost of the best sites, and increased rents. The report provides more specifics on market dynamics in the nation’s key distribution markets, such as New Jersey, the Inland Empire, Chicago, Atlanta and others. Demand is also growing in secondary markets such as Indianapolis, Memphis, Phoenix and Houston as tier-one markets become congested, new trade routes become viable, and population grows. Fully-leased big boxes continue to represent one of the most stable asset classes in commercial real estate, often occupied by a single, credit-worthy tenant on a long-term lease.