SoCal Real Estate report "Preparing Industrial Distribution for the Holiday Season."28 Nov 2018
Cody Lerner, Senior Associate, sheds light on how retailers gear up to make sure their industrial distribution is ready for the holiday season.
As SoCal Real Estate recently reported, almost as if preparing for the holiday season, there were 89 industrial projects under construction in the Inland Empire during Q3, totaling 20.5 million square feet, according to a release from a representative of Avison Young (AY). The firm’s research shows that 34 buildings, totaling 8.34 million square feet, were delivered in the quarter, and nearly half of these were 150,000 square feet or larger — with another 40 buildings of this size under construction.
The statement said the holiday shopping season can make or break many retailers, and they realize the importance of planning for their distribution needs 12 to 18 months ahead of the holidays, according to Cody Lerner, a senior associate with AY’s Inland Empire office. Lerner said retailers are actively preparing year-round for the “what ifs.”
We spoke with Lerner about how retailers gear up to make sure their industrial distribution is ready for the holiday season and the changes that are taking place at the bricks-and-mortar level to accommodate the shift from in-store to online shopping.
SoCal Real Estate: What planning and preparation do retailers need to do to make sure their industrial distribution is ready for the holiday season?
Lerner: Businesses spend 12 to 18 months planning for the next holiday shopping season, including looking at projections for consumer spending, what types of goods will be in demand, where those goods will come from, and how their facilities will handle any added volume or shift in the flow of distribution. Retailers create plans for their industrial space to allow for responding to a variety of changes, such as shifting demand for certain electronics or apparel or increasing sales from a different geographic area. They need to know ahead of time that their real estate facilities can handle the volume and that they have a plan for moving goods from one facility to the next to meet market demand.
Retailers typically have multiple contingency plans to handle any changes in consumer buying patterns, as well as issues with suppliers, port access, and their labor pool. Most of the time, retailers see a positive outcome because they prepare so well, but it means thinking many months ahead about all the factors that affect their supply-chain operations.
What are retailers doing less of now that e-commerce has become such a big part of holiday shopping?
E-commerce has forced retailers to be creative about how they engage with shoppers. They are relying less on large stores with static displays and racks and racks of merchandise and focusing more on building relationships with customers in the store and merchandising efficiently for the targeted client base. They are combining a smaller bricks-and-mortar footprint with strategically located industrial space to complete the retail buying process as efficiently as possible. If a customer wants an item that is not found in the store, how can they access their inventory management and industrial space to get it to them quickly?
What changes are taking place at the bricks-and-mortar level to accommodate this shift?
Retailers realize that e-commerce has to be part of their overall strategy. They are now planning for shoppers coming from multiple directions, whether it’s in-store, online or a combination of both. Some are offering holiday promotions designed to get people into their stores, where they hope to sell more goods and have some shipped from a nearby fulfilment center. Others are setting up areas for customers who order online and want to pick up goods in the store.
What else should our readers know about this topic, particularly as it relates to Inland Empire industrial space?
Amazon is certainly a major force in the industry, operating approximately 3.5 million square feet of existing space in the Inland Empire alone — in Ontario, Perris, and Rialto — with another 640,000 square feet on the way in Beaumont. It’s important to note that Amazon is not the whole story, however. There are many small to medium-sized retailers and suppliers that support Amazon and other large retailers and are vital to e-commerce growth.
These smaller businesses might sell through Amazon or their own online channels or provide logistical support or the packaging or transportation for online sellers. There is a large network of companies and people who all contribute to the e-commerce process, and they are a growing force in Southern California.
Many of these businesses are also expanding and need industrial space, which is creating a demand for mid-sized building, ranging in size from 150,000 square feet to 300,000 square feet for warehouse, fulfilment, and distribution.
According to CoStar, recent industrial leasing and sales activity in Riverside, San Bernardino, and Los Angeles counties shows solid momentum in the small to mid-sized transaction range. In 2018, there were 372 lease transactions from 25,000 square feet to 200,000 square feet, with 216 of those in the 25,000-square-foot-to-50,000-square-foot range. In 2017, there were 536 lease transactions from 25,000 square feet to 200,000 square feet, with 285 of those in the 25,000-square-foot-to-50,000-square-foot range.
Sales of similarly sized buildings also were strong. In 2018, there were 748 sold in the 25,000-square-foot-to-200,000-square-foot range, with 419 sales in the 25,000-square-foot-to-50,000-square-foot range. In 2017, there were 933 transactions in the 25,000 square-foot-to-200,000-square-foot range, with 519 in the 25,000-square-foot-to-50,000-square-foot range.
Also, the Inland Empire alone has 89 industrial projects totaling 20.5 million square feet under construction as of Q3 2018, according to Avison Young research.
Given the strong demand for modern industrial space closer to the ports, we are seeing developers pushing activity outside of the Inland Empire west to Perris and other locations. As rents climb in the Inland Empire, tenants are facing tough decisions about whether to pay the higher rents or move to these growing areas and balance the lower rent with the added costs for moving goods to and from the ports.
Also, demographics have become a critical part of the planning process for industrial users, particularly those in the e-commerce sector. Industrial users need to carefully examine where population growth is today and where it’s headed. That information is critical when planning for new industrial space, in terms of location, size and planning for expansion.