Opportunities in Industrial Real Estate—and the Impact of E-commerce6.6.2016
By Steven Denholtz, CEO Denholtz Associates
Much has been said about the impact of e-commerce, specifically Internet retailing, on the bricks-and mortar retail. Indeed fully 10% of retail spending is now done outside of stores. Internet sales at the top companies has been growing by 25% year-over-year.
The attraction: Click-to-ship from Amazon is available in as little as 20 minutes. Same-day and next-day service also means that product inventory has to “get local.” As a result, logistics has been impacted to the extent that the major e-commerce companies have increasingly invested in close-in distribution facilities in major metro areas instead of placing their facilities in remote areas outside of population centers.
In a national industrial real estate market that totals between 10-15 billion square feet, new product for fulfillment has been adding 100 million new square feet. The statistics show 15% growth of E-commerce annually, reaching $300 billion in the U.S. Globally, the number is $23 trillion.
There are also a number of ways for consumers to receive the products they purchase online. Those options include directly from an online retailer like Amazon, or directly from a manufacturer, through retail locations, or from third-party distribution centers. The variety of options is part of the impetus behind e-commerce’s steady growth. Indeed, more options and more distribution centers equals shorter delivery times, a key factor in today’s “must-have-it-now” retail environment. And that can be achieved by a consumer never leaving home to go to a retail store.
The most expensive and time-sensitive products in terms of delivery include food and electronics. Less sensitive in that regard are such products as furniture and apparel.
The nature of the e-commerce business is changing the way others do business. For example FedEx, which has seen its business grow substantially because of the e-commerce trend, is now charging suppliers by “dimensional weight” and new suppliers have emerged, such as door-to-door organics. Amazon has adapted, managing its transactions, delivering some products while its vendors deliver others.
Such traditional retailers as Macy’s have signed on – all of the retail giant’s stores now deliver. Wal-mart offers “click to collect,” and Google offers “shopping express.” E-commerce now accounts for 13% of Nordstrom’s total sales, 15% of Nike’s, and 4% of The Home Depot’s—and those numbers are growing.
And the technology continues to evolve. RFID, or radio-frequency identification, for example, utilizes electromagnetic fields to automatically ID and track tags attached to the shipped items.
In the bigger picture, total retail sales are showing a 3% average annual increase. Comparatively, total Internet sales are growing by 11% annually. As to the impact on the industrial real estate that supports logistics, properties are seeing a 20% increase in rents nationally in primary markets, and 14% in secondary markets. The spread to 10-year Treasuries is 2 vs. 5.1% and 310 basis points, with $50 billion of annual investment sales encompassing 10 billion square feet in the past year. Foreign investment amounted to 37.4% of total sales.
Nationally, the vacancy rate for industrial is 6.7%–well below the cyclical low of 2007. The net absorption for the past year was 219 million square feet, and the overall tightness of the industrial market resulted in 170 million square feet of new construction.
For New Jersey, the Northern New Jersey market totals 350 million square feet, and Central New Jersey offers 271 million square feet. Average industrial asking rents are $6.20 per square foot in the northern part of the state, and $5.31 in South Jersey, and the state has seen three years—12 straight quarters—of positive absorption. And 90% of new leasing is warehouse/distribution, not manufacturing.
The overall vacancy rate is a scant 7%—and New Jersey has an ideal location between and within major population centers. Overall, 84% of new construction is speculative, and that new construction is coming in a larger market where the average property age is 35-50 years old. On the investment side, 2015 saw 6.8 million square feet sold with san average cap rate of 5.85%.
The market continues to evolve, both for New Jersey and nationally. E-commerce is on a roll and is expected to continue to grow at its current pace, particularly as products and technology continue to evolve and the buying public increasingly adapts to the genre. In addition to its impact on the larger retail picture, e-commerce will continue to be a driver for industrial real estate, which provides the very foundation supporting the delivery demands of the buying public.
At Denholtz we’re always looking for creative ways to meet the needs of today’s industrial users. We’re in the process of remediating and renovating the former 74,325-square-foot Acme Tube manufacturing facility at 655 Howard Ave in Franklin Township, NJ. The property is being marketed for sale or lease with an August occupancy date. We’ve already seen a lot of interest, which supports the demand trend for upgraded, well located industrial space and are always evaluating new opportuniti