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CRE Finance World, Winter 2014

Industrial Real Estate and E-Commerce: The Evolution of Warehouse/Distribution Space amounts of inventory on their shelves. This created less of a need for space at the warehouse. Additionally, the items were not being individually packaged for customers at the warehouse, thus cutting down on the need for space. As a result, a smaller workforce was employed, meaning less need for building space as well as parking space. Essentially, e-commerce has cut the retail center out of the equation. In effect, warehouse and distribution centers have evolved into retail/industrial hybrids. The need to keep larger stocks of inventory that used to be on store shelves,and to package and send out items in-house has generated the need for bigger centers. Developments in logistics and technology have also helped boost demand for larger centers. Higher ceilings are now required to accommodate CRE Finance World Winter 2014 40 the stacking of items in an effort to better utilize space. The higher stacking of inventory also necessitates floors that can support heavier loads. More dock doors are needed for the ever greater amount of trucks coming in and out of these distribution centers. More advanced sprinkler and HVAC systems are vital to support the bigger spaces, greater amount of workers and more advanced technology. All of these developments are driving the demand for newer and bigger warehouse and distribution centers. Implications of the Demand for Big Box Industrial Space Seeing as how new, “big box” space is now in high demand, those metros with large swaths of big box space stand to gain the most from this trend. In fact, this has already been the case. Using Reis’s industrial database, we identified what we will refer to as the top ten big box metros. We ranked our metros based on the total amount of space in all buildings of 500,000 square feet or greater. Included in this group was Los Angeles, the Inland Empire, Chicago, Dallas, Atlanta and others. Figure 3 Big Box vs. Non-Big Box Metros Source: Reis, Inc. By comparing the fundamentals of the big box metros to those of all other metros, the outperformance of big box metros becomes evident. In Figure 3, we indexed the occupancy rate and effective rent for both big box metros (in blue) and all others (in red) back to the first quarter of 2010. For each statistic, the big box metros show a faster pace of recovery, starting around late 2010. As time has gone on, the spread between the two lines has widened. The pace of recovery in non-big box metro’s occupancy has kept up fairly well with big box metros, but rent growth has been noticeably stronger for all big box metros. Whereas rent in big box metros is almost back to early 2010 levels, effective rent in all other metros still has a full 3% to gain to reach that point. Figure 4 demonstrates the same trend. The blue columns represent the year-over-year difference in effective revenues per unit at the metro-level, a measure that accounts for changes in effective rents and occupancies. This analysis reveals which metros have performed the best and the worst since the second quarter of 2012. Given what the last graph detailed, the results are not surprising. Among the top five performing metros are what many would consider big box metros: Houston, San Bernardino (Inland Empire), Chicago and Atlanta. In contrast, the worst performers are mostly smaller markets whose inventory of big box space pales in comparison to the top performers. “The recent recovery in industrial real estate is not a tide that is lifting all boats. There is a clear dichotomy between the recovery for newer, larger warehouse space versus that of older, smaller properties.”


CRE Finance World, Winter 2014
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