E-commerce growth pushes investors to ‘infill’ properties

Scarcity of available sites sends industrial real estate rents soaring and sticker shock is setting in.

E-commerce sales in the United States are projected to increase by over $200 billion by 2025, according to a recent report from CenterPoint, a major investor in industrial real estate. Every increase of $1 billion in e-commerce revenues, the report went on to conclude, generates demand for 1.25 million square feet of additional industrial space.

These figures suggest that some quarter of a billion square feet of new e-commerce industrial space will be required in the U.S. over the next four years, a conservative estimate compared to the one-billion square-foot projection reached by another real-estate maven, JLL. That explains why investors like CenterPoint are on a buying spree, snapping up desirable parcels—and where they are acquiring this real estate. E-commerce, with its ever-tightening delivery expectations, requires that smallish facilities be located in population centers, and that is where many investors are focusing their efforts.

With investors on an acquisition binge, it’s not surprising that industrial real estate rents are on the increase. The spiking demand for e-commerce storage space is starting to equalize retail and industrial rents, according to Gillam Campbell, research manager for U.S. industrial property at JLL. In the last ten years, she said, retail rents have increased 19.6%, while the industrial sector experienced a 57.1% hike.

“2019 saw the beginning of the rent compression, which coincides with a big jump in e-commerce’s share of retail sales,” Campbell explained.

Increased demand for warehousing space is also being pushed by other conditions, such as the rush to replenish stocks depleted during the COVID-19 pandemic and the desire to buffer inventories in the face of potential future supply-chain dislocations. “Supply chain volatility,” noted a recent report from CBRE Research, “further heightens the need for additional warehouse space to stockpile goods and mitigate future disruptions….A trend toward shorter, more resilient supply chains has gathered pace over the past year.”

Coastal Strategy and “Infills”

CenterPoint’s acquisitions strategy is focused on two related prongs: acquiring properties near West Coast and East Coast seaports and keeping an eye out for “infill” properties. “Many companies would prefer to store additional inventory near ports of entry,” according to the CBRE report, explaining that aspect of the strategy. The problem is that “little warehouse space is available in these markets;” seaport markets finished 2020 with an average vacancy rate of 3.6%. “Only 75 million square feet was under construction in these markets at the end of 2020,” the CBRE report added, “with more than a third of it preleased.”

Those facts, combined with the requirement for smaller properties in metropolitan areas, explain the infill aspect of CenterPoint’s strategy. Infill, in commercial real estate, refers to the development of urban or suburban land, often empty lots, unused buildings, or under-used buildings, in built-up areas. One advantage of infill development is the ready access to existing water, power, and communications infrastructures.

“Infill land sites across the country have experienced explosive rental growth in recent years,” said Evan Lippow, CenterPoint’s senior vice president of investments.

The lion’s share of CenterPoint’s investments since the beginning of 2020 has been along the West Coast, with the addition of 17 properties in Southern California, Oakland, and Seattle, totaling 25 buildings and over 3.75 million square feet of space, making CenterPoint one of the most active investors in the West last year, according to Lippow. He expects 2021’s volume to surpass last year’s, as the company “zeroes in on port and infill properties that help solve e-commerce supply chain challenges.”

But CenterPoint has not neglected the East Coast, becoming one of the largest landlords in New York City outside of Manhattan in 2020 when it acquired three last-mile facilities in Brooklyn. Known as the Flatlands Portfolio, the deal covered 925,000 square feet of space. In December 2020, the company completed the acquisition of four buildings in Miami-Dade County, Florida, totaling 1.46 million square feet.

One feature of CenterPoint’s infill strategy is to look for “low-coverage” properties, where the building occupies a relatively small proportion of the total acreage, leaving room for parking and outdoor storage. “With the growth of e-commerce,” said Lippow, “demand for low-coverage facilities near major metropolitan cities is at an all-time high.”

That’s one reason, along with the decline of brick-and mortar retail in some locations, why millions of square feet of big-box retail space has been converted into storage space in the last year. While demand for low-coverage facilities has catalyzed this transformation, said Lippow, it’s “still in its infancy.”

So, for example, in May 2021, CenterPoint closed on a 112,000 square-foot commercial building in Norwalk, California, 20 miles northeast of the ports of Los Angeles and Long Beach. One of the property’s salient features is that the building covers just 27% of the property. Other 2021 acquisitions, from Bell Gardens, California, near downtown Los Angeles, to Secaucus, New Jersey, in the Meadowlands, across the Hudson River from New York City, were bought with the same attributes in mind. In the case of the Secaucus acquisition, the building covers 11% of the three-acre property.

“The Meadowlands is predominantly comprised of higher coverage product that is older and functionally challenged,” said Lippow. Secaucus, a major submarket in northern New Jersey, has limited available and suitable infill properties and also suffers from “high entry barriers due to a high percentage of institutional ownership.” CenterPoint’s recent Meadowlands acquisition features “proximity to major arteries servicing Manhattan,” noted Lippow, “and the existing parking component made it ideal for tenants looking to service New York City.”

All of these conditions point to the likelihood that CenterPoint will see a handsome return on its New York-area investment in the form of elevated rents. JLL’s Campbell expects the trend of increased rents for industrial spaces to persist “as low vacancy rates continue to set the stage for a competitive leasing environment.”

The CBRE report concurs, while renters “must overcome the ‘sticker shock’ of higher rents, occupancy costs remain a low portion of overall supply-chain costs. This will give landlords room to continue increasing rental rates for the foreseeable future.”