June 20, 2014 Meissner

E-Commerce Buoys Demand for Industrial Space

E-commerce began in the 1960s and affected all aspects of shopping, including brick-and-mortar stores.  The age of electronic transactions via a shopper’s computer or mobile handheld smart device has fueled the consumer industry and consequently affected the commercial real estate industry.

When buying and selling goods over the internet gained momentum, store owners and suppliers of commercial space questioned the continued viability of traditional retail store fronts.  Since Amazon, eBay and others have catapulted e-commerce into the fastest-growing retail network in the world — online retailing has been growing by an annual average of more than 18% globally — the commercial real estate industry expected to see a reduced demand for physical retail space in malls and shopping centers.

However, the need for retail space still exists. Instead of closing their doors in a sign of defeat to e-commerce, brick-and-mortar retailers are remaining competitive by adapting their stores’ back room into a fulfillment center.  This new model challenges the previous distribution strategy by merging physical stores and e-commerce delivery in order to deliver a ship-from-store option.

Shoppers can order online, have the order fulfilled through the store’s back room, and easily return to a physical store if the merchandise is not to their liking.  The back room acts as a mini-distribution center.  Among JLL’s ship-from-store capable clients, 10 – 15% are using this option, and there’s strong interest in growing the channel.

As this trend continues to take hold, it is anticipated that there will be an increase in demand for industrial space in the form of e-commerce fulfillment centers (ECs) to supplement the limited inventory volume that ship-from-store retailers are able to provide. When stores are integrated into fulfillment strategies they can support larger distribution centers (DCs) and EC networks to become companions in the competition for online customers.  ECs differ from traditional DCs in that they are typically smaller and strictly satisfy online orders.

DCs call for large contiguous blocks of industrial space, usually with expansive truck / trailer parking and docking facilities, and high roofs for multiple mezzanines.  Whereas ECs typically demand medium-sized facilities.  No matter the size, industrial space continues to be in demand and is expected to rise in locations with close proximity to road and rail networks.

Meissner Jacquét Commercial Real Estate Services is aware of the demand for industrial space in San Diego as Warehouse/Distribution vacancies have been steadily declining and rental rates continue to steadily increase over the past 3 years. Kevin Tagle, Vice President at Meissner Jacquét, says that “San Diego is familiar with technology start-ups” and he thinks that “the call for ECs can be similarly answered by the San Diego commercial real estate market as long as construction continues to deliver completions and developers respond to the demand.”

With the demand, comes new construction and retrofitting of existing industrial space – and most importantly — creation of jobs.  Home Depot’s ECs are expected to employ about 300 workers each.

As Title 24, Part II of the California Building Code goes into effect on July 1st of 2014, developers of all forms of commercial space will have to comply with more stringent energy saving measures when dealing with Tenant Improvements, Capital Improvements, and Ground Up construction projects.  The code aims to conserve more energy in the short term and provide provisions for future improvements, but will increase construction costs and negatively affect schedules, dependent on the size and scope of a project.

Investors in ECs and DCs have a significant stake but may be able to access rebates or financial incentives offered by the government or local energy companies.  A recently established Macy’s DC located in Martinsburg, WV received $17.3 million in tax and other incentives.

Commercial real estate professionals should acquaint themselves with the new Title 24 codes, as demand for DCs and ECs in response to the e-commerce concept is expected to go beyond retail and industrial space.




Cushman & Wakefield

California Energy Commission

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