Thursday, May 10, 2012

Demand for ecommerce warehousing and distribution facilities on the rise

The North American warehousing and distribution market is finally experiencing renewed interest after high vacancy rates affected the market during the recent economic downturn. While there is still hesitancy towards speculative building of new facilities in many markets, build-to-suit requests appear to be on the upswing. One of the trends affecting the increase in build-to-suit requests is that of the growth of ecommerce.

Ti noted the growth of ecommerce in the August 2, 2011 brief, “E-commerce sales drive US warehousing and distribution projects”.  Since then the growth of specialized warehousing and distribution facilities specifically for ecommerce has increased immensely.  Why the growth for such specialized facilities? The retail industry is undergoing change and thanks to the increasing use of smartphones, free shipping and the ability to research product reviews before making a purchase has resulted in increasing e-retail sales. In fact, according to Forrester Research, US e-retail sales are anticipated to grow 10% a year to $279bn by 2015 and will represent 11% of all retail sales.

The placement of ecommerce facilities varies among companies - depending on their growth strategy. Some such as retailer Macy’s has opted for a regional approach and has four fulfillment centers devoted to ecommerce. These facilities are large and are in excess of 1m sq ft. Instead of a regional approach, however, has a different method, choosing instead to build facilities closer to its customer base and as a result has quite a few facilities.

When deciding upon a location for such a facility, key factors are considered such as sales taxes and state incentives, close proximity to major markets, a good labor supply to utilize in normal and peak seasons and close to transportation hubs.

State taxes have been a major issue for e-retailers for years. In particular, has been a focal point as it has refused to locate a facility in such states that enforce sales tax on online purchases and has in fact pulled out of states that have imposed such a tax. However, as more states begin to implement sales tax on online purchases, is rethinking their strategy and as such announced plans to build facilities in California for example.

Locating facilities close to transportation hubs is another important consideration – particularly as many e-retailers operate in a 2-5 day delivery time frame. In order to achieve this delivery time, many facilities are locating to states such as Tennessee, Virginia, Ohio and Pennsylvania as these states are close to both UPS and FedEx primary hubs as well as to intermodal hubs. While many ecommerce orders are delivered via small parcel providers such as UPS and FedEx, regional small parcel providers, US Postal Service, trucking companies, rail and intermodal services are used as well depending on service level and cost.

As ecommerce continues to grow, demand for new warehousing and distribution facilities will increase. Information on additional trends as well as on major logistics hubs in the US, Canada and Mexico is available in Ti’s latest report: North American Warehousing andDistribution Market.