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models , including click-and-collect and curbside pickup , not to mention the need to account for the return of goods .
What does all this mean for the supply chain ? More changes ahead . In addition to thinking about the amount and location of space , a company also must look closely at the different types of space required based on what part of the supply chain it serves , notes Dohm .
The pandemic has put added pressure on supply chains and pushed companies to rethink how goods flow along that chain from first mile to last . “ COVID took the industry from perhaps the first inning to the third or fourth inning , but we have a long ballgame still to go in the last mile ,” says K . C . Conway , CCIM , MAI , CRE , chief economist for CCIM Institute and principal of Red Shoe Economics . Costs for last-mile delivery remain notoriously high , accounting for 40 to 50 percent of a company ’ s logistics costs , according to some industry reports . On the consumer side , there are two main logistics models . One is the Amazon model , where products are being delivered direct to the doorstep . Another option is the click-andcollect model . “ I don ’ t think the Amazon model is sustainable from a cost standpoint ,” Conway says . “ Even Amazon admits that it can ’ t continue with its last-mile cost burden the way it is currently structured .”
The changes occurring in supply chains will push CRE professionals to sharpen their site-selection skills . The costs associated with not getting the logistics right , such
The pandemic greatly accelerated e-commerce sales . According to the U . S . Census Bureau , e-commerce as a percentage of total retail sales increased from 11 percent in 2019 to 14 percent in 2020 .
as insufficient truck docks or access to facilities through roadways prone to heavy traffic congestion , can be hugely expensive . “ As companies look at how COVID-19 changed demographics and where people work , the skillset required to do site-selection analysis needs to be much more robust ,” Conway says . “ Industry pros can benefit from beefing up site-selection skills , because I think we are
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LOGISTICS FIRMS REMAIN HUNGRY FOR SPACE
going to see new site-selection activity over the next two years that we haven ’ t seen in a long , long time .”
APPETITE FOR CONSTRUCTION The pandemic greatly accelerated e-commerce sales . According to the U . S . Census Bureau , e-commerce as a percentage of total retail sales increased from 11 percent in 2019 to 14 percent in 2020 , with a total spending of $ 791.7 million on online purchases . It is estimated that for every $ 900 increase in e-commerce sales , there is one additional square foot needed for distribution space , notes Joseph Fisher , CCIM , president of Fisher Investment Real Estate in Indianapolis . “ As we see these huge increases in online retail sales , that indicates a healthy need for increased distribution ,” he says . That said , there are some counter forces to that demand , including logistics facilities that are becoming more automated and efficient , which allows occupiers to get more revenue out of existing space per square foot , Fisher adds .
Market fundamentals in the North American industrial sector remained strong throughout 2020 , and first quarter net absorption reached 82.3 million sf , according to Cushman & Wakefield . That is the highest first quarter absorption the firm has ever recorded . Cushman & Wakefield also is predicting that demand from e-commerce and a heightened focus on supply chain resiliency will drive robust leasing activity , record construction , and all-time high rental rates in 2021 and 2022 .
“ The pandemic really accelerated about 10 years of e-commerce adoption into a single quarter last year . Consumers literally changed their buying habits overnight due to stay-at-home orders ,” says Adam Marshall , CCIM , SIOR , a senior managing director at Newmark in Chicago . Retailers had to scramble to offer new and better ways to shop at home , forcing them to increase distribution space near population centers or hire third-party logistics providers to handle that e-commerce fulfillment . In Chicago , for example , demand for distribution space is pushing location strategies into some areas that may have been overlooked prior to the pandemic , such as large redevelopment sites within the city of Chicago and close-in suburbs . “ That , in turn , has increased land values and lease rates across the board ,” Marshall says . Speed to occupancy also is very important right now , and new Class A spec buildings that are complete or near completion are in high demand , he adds .
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“ Prior to the pandemic , demand for distribution centers and industrial properties was pretty high , and the interest in that logistics real estate space has only grown in the pandemic ,” says Carter Andrus , president of the Central Region at Prologis Inc . Certainly , the surge in e-commerce has spurred demand for more distribution and fulfillment space . Prologis reported in its 4Q2020 earnings call that it signed 65 msf of new leases globally in the fourth quarter . New leases in particular rose 22 percent year-over-year on a size-adjusted basis . Although a broad range of customers signed new leases in the fourth quarter , e-commerce activity accounted for 19.8 percent of new leasing .
Another factor boosting demand is that companies have been reassessing inventory levels and moving from the leaner “ just-in-time ” model to “ just-in-case ”
inventory , which is creating more demand for space . “ That was one of the lessons to come out of the pandemic , where some companies lost revenues because they didn ’ t have the stock on hand ,” says Andrus . Supply chains also are having to deal with reverse logistics , which is creating demand from the goods coming back into the supply chain , he says .
STRENGTHENING SUPPLY CHAIN EFFICIENCY Companies look at how quickly , how reliably , and how costly it is to move goods along the entire supply chain . Transportation costs and related infrastructure both have a big influence on location decisions . The top three issues when it comes to site selection for logistics locations are the overall adequacy
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Photo by Vanit Janthra |