Industrial Developers Need To Start Thinking Like Retail Developers

For much of the last century, industrial developers scouting new warehouse locations had a fairly simple guideline: Follow the flow of goods. In coastal ports, railyards and air traffic hubs, warehouses went up wherever products came in.

Today, many Americans expect goods on a compressed timeline. As they work to be closer to consumers, industrial developers must follow hiring booms and income growth just as they once followed shipping containers and cardboard boxes. Fortunately, to learn how to follow people, industrial developers can simply look at retail developers.

“Retail developers have always been keyed into where people are moving, where they’re flying, where they’re retiring,” said Joshua Harris, academic director at the Schack Institute for Real Estate at New York University. “The demographic composition and income characteristics of cities are going to become more and more important for industrial developers.”

The advent of one-day shipping is largely responsible for this change. Five years ago, online shoppers could expect their package in five to seven business days, or else shell out an exorbitant fee to receive it sooner. In that climate, Harris said, a retailer could survive operating out of two warehouses nationwide.

To offer two-day shipping, Harris said, companies still only needed a handful of centrally located warehouses in key locations like Los Angeles or Memphis. They could move products by truck on the first day, then hand them off to couriers like FedEx or DHL for local delivery. 

But to cut that time down to one day takes a proximity to consumers that industrial developers had never needed before. Previously, the developers that had prioritized being located close to consumers were storefront retail developers.

“With one-day shipping, you need to have the products people are going to order pre-positioned within the cities where you’re about to deliver them,” Harris said. “That takes a network of smaller-format warehouses right next to population centers.”

The scarcity of these last-mile locations has pushed warehouse vacancy to a historic low and made the industrial space the darling of commercial real estate investors, from Prologis’s acquisition of DCT Industrial Trust to Blackstone’s more recent $19B acquisition of GLP’s North American last-mile portfolio.

Yet finding lucrative last-mile space is not as simple as being close to people. To find their target market of consumers, industrial developers need to do the same due diligence that retailers have done for years. Harris described how choosing a location in the central United States looks vastly different in the era of one-day shipping than it did 10 years ago.

“I used to be able to keep a warehouse in Memphis and ship to both Cleveland and Nashville in two days,” Harris said. “As a last-mile developer, I now have to choose between the two cities.”

Nashville, for instance, has become one of the fastest-growing cities in America, and is attracting the high-paid technology and service workers that tend to order more products online. Meanwhile, the population of Cleveland has been steadily dwindling as Ohioans with college degrees increasingly look elsewhere for work.

Because job growth is the single largest leading indicator of valuable last-mile space, Harris said, developers should follow businesses. States like Texas and Florida that offer friendly environments for businesses to grow could see more job growth that translates to more need for industrial last-mile space.

“Florida also has the added benefit of being a place where people like to retire,” Harris said. “Industrial developers can’t just follow where products go, they need to look for quality-of-life indicators, to see where people will want to live.”

As industrial development shifts further toward last-mile warehouses, the sector could become more volatile. Retail has long been subject to consumer trends, and last-mile deliveries could similarly suffer in an economic downturn or even from a local spike in unemployment. 

The industrial sector has always been somewhat distant from consumer trends, Harris said, but that era may come to a close as more of the population begins to order online. E-commerce giants like Amazon appeal largely to consumers with high incomes, but the company is gaining ground with other Americans.

“An Amazon Prime membership might make sense for the average shopper at Whole Foods, but not for the average shopper at Walmart or Dollar General,” Harris said. “But that could all change as e-commerce becomes even more widespread.”

When that rebalancing will happen, Harris said, is one of the most fascinating questions in industrial development today.

As the two sectors grow, retail may also learn lessons from industrial. Even as in-store sales fall, Harris pointed out that box stores like Macy’s and J.C. Penney are now having employees fulfill online orders right from their brick-and-mortar stores.

“Retailers and retail landlords are going to find ways to make the most of the spaces, one way or another,” Harris. 

Harris will give the opening remarks at NAIOP’s ICON East Conference in Jersey City, New Jersey, Sept. 12 to 13.

This feature was produced in collaboration between Bisnow Branded Content and NAIOP. Bisnow news staff was not involved in the production of this content.