Last-Mile Access to Customers Drives Distribution Center Conversions

August 20, 2019 (NEW YORK, NY) – E-commerce has been driving demand for industrial real estate for several years, but steadily increasing online sales coupled with growing consumer expectations for speedier delivery continues to put pressure on merchants to bridge the last mile to their customers. Considering that these projects are located in densely populated areas where land and available product are typically scarce, developers are increasingly converting obsolete warehouse and other properties into fulfillment centers.

For space that matches their needs, tenants are less price-sensitive than they have been historically, says Kenneth Salzman, SIOR, executive managing director and principal for commercial real estate service provider Lee & Associates. But tenants are avoiding taking more space than they need just to have it available in the future, he adds.

“It’s less a space race and more that businesses want to reach their customers more quickly,” explains Salzman, who is located in the company’s New York office. “And the demand is not just coming from Amazon and other online retailers — traditional companies want to be able to ship their products to their customers more quickly because they’re competing with online resources, as well.”

Online retailers and shippers are typical tenants of the buildings — even the U.S. Postal Service occupies last-mile space temporarily during the holiday season, Salzman says. But not any old building will do. Developers are hunting for ceiling heights and floor loads that can accommodate high-tech robotic racks and multistory buildings that have truck ramps on each level. In some cases developers are considering popping the tops of buildings to create more height, Salzman says.

Developers also look for sufficient power to run robotic storage and retrieval systems to pick and stage orders prior to shipment, as well as early suppression fire response (ESFR) sprinkler systems tailored for distribution buildings. Often that infrastructure isn’t readily available, requiring developers to upgrade the buildings. For example, in New York, Prologis acquired the former 205,000-square-foot ABC Carpet & Home Outlet Center in the Bronx in 2017, and improvements included adding loading docks that could accommodate 53-foot trailers and installing LED lighting and an ESFR system.

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