Increased development in the industrial sector – E-commerce is a huge driver for big-box space.

The U.S. industrial market continued to show momentum with strong leasing velocity and absorption, as well as construction levels that have already surpassed last year’s total. The overall vacancy rate fell to 8.2% in the third quarter, 300 bps below its recessionary peak in the first quarter of 2010. The U.S. industrial sector has now absorbed 279.3 million square feet of space since year-end 2011 and the last three years from 2011-2013 will go down as the strongest period on record for net absorption.

While location has long been the most prominent driving force in real estate, e-commerce is redefining the meaning of “ideal location” for a fulfillment center. As retailers attack the “last mile” issue, the trend in technology is affecting the demand for warehouse space – not only in the amount of space, but also the location of the facilities. To meet demands being driven by e-commerce, technology and transportation costs, companies are actively streamlining their fulfillment processes – maximizing efficiencies in inventory, service time and delivery – which is driving demand for high-quality space. With next-day delivery required and same-day delivery becoming more popular, e-commerce fulfillment centers must be close to population centers.

In response to this new demand driver, we are seeing a significant amount of new development projects that are either exclusively or significantly catering to e-fulfillment—both e-commerce-only retailers like Amazon and multi-channel retailers such as Walmart, Target and others seeking to expand their e-commerce business. This year, Walmart signed a 1.2-msf deal in Lehigh Valley and another 788,000 square feet in Dallas. Nordstrom previously said its Iowa Distribution Center had abundant capacity – but now the chain is in the market looking for a new fulfillment center to support its e-commerce operations.

New industrial construction levels continue to rise, including a significant amount of speculative product. This trend is expected to remain , especially in port and intermodal markets. Construction completions totaled 60.0 msf through the third quarter, already surpassing 2012’s year-end total of 58.0 msf.  An additional 21.7 msf of speculative development is scheduled to be completed by year-end. The Inland Empire leads the nation in construction activity at the end of the third quarter, with 16.4 msf currently in development, followed by the Pennsylvania I-81/I-78 Corridor, with 8.3 msf.

The global economy is also having a profound effect on the location of distribution centers. The cities that are especially well-positioned to attract new distribution projects are those that link to the global economy through ports and airports.  Additionally, the expansion of the Panama Canal, set for completion in 2015, is already affecting distribution warehouse site selection. Container shipments are projected to increase tremendously at U.S. East Coast ports and  expansion of the Panama Canal could be a game changer for South Florida industrial real estate. Miami, which handles more traffic from Asia than any other Florida port, still gets 54% of its trade from Latin America and the Caribbean compared to 18% from China. Florida’s location is unique in the U.S. because of its position for east-west and north-south trade.

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