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Urban Warehouse Construction on the Rise, Thanks to Ecommerce Growth
The year 2020 was challenging for retailers, in great part due to the lockdowns imposed to contain the COVID-19 pandemic. However, the US ecommerce sector had an excellent year according to eMarketer, growing by 32.4% and reaching a sales volume of $792 billion. Warehouse construction has also increased as a result of ecommerce growth, since the products being sold depend on logistics services to reach customers.
According to the 2021 Commercial Real Estate Outlook from Deloitte, retail and lodging were the most heavily affected sectors in 2020, with a respective drop of 26.8% and 173.9% in their funds from operations (FFO). On the other hand, data centers experienced an 18.1% increase in FFO, and industrial real estate (including warehouses) had an increase of 11.2%.
Warehousing services and data center infrastructure are both necessary to support the growth of ecommerce. Not all retailers have the expertise and resources to develop these services in-house, and they often rely on external providers. According to the latest growth projections from eMarketer, the US ecommerce sector could have a sales volume of $933 billion in 2021 (17.9% growth), and $1,089 trillion in 2022 (17.3% growth).
Ecommerce will continue to grow at a steady pace in the near future, and the demand for warehousing and data center services will also increase, stimulating commercial construction. Developers who own properties that are currently vacant could re-purpose them to offer these services, making them lucrative again.
Urban Fulfillment Centers: An Emerging Trend in Warehouse Construction
With the growth of ecommerce, customers now expect faster deliveries. Just a few years ago when Amazon Prime was introduced, two-day shipping was considered a luxury service, and users were willing to pay more for delivery speed. However, many clients now expect one-day delivery, or even one-hour delivery in some product categories.
Warehouse construction is focusing on urban fulfillment centers, which have the goal of storing products closer to the customer and reducing delivery times. Traditionally, products have been delivered from large distribution centers in suburban or rural locations, but distance is becoming an issue now that customers expect faster deliveries.
The main challenge for urban fulfillment centers is the limited space available in metropolitan areas. However, this has been addressed with technology:
- By using picking robots and other warehouse automation systems, retailers can greatly reduce their space requirements for storage. Compared with human workers using ladders and forklifts, robots can move in much less space.
- Warehouse automation also allows taller storage racks, since products high above the ground can be easily reached by lightweight robots mounted on rails.
For example, a distribution center that was originally intended to have 250,000 sq.ft. may fit in less than 50,000 sq.ft. with warehouse automation technology. These compact and automated warehouses are called micro-fulfillment centers, and some of the smallest designs can fit in less than 5,000 sq.ft.
Finding a lot that is large enough for a new distribution center in a city can be difficult, and even if the land is available, developers can expect a high cost. On the other hand, a micro-fulfillment center can operate in a small commercial space, or even inside an existing store.
The concept of automated warehouses in urban locations is especially promising in the grocery sector, for two main reasons:
- Individual orders tend to have many different products.
- Customers expect a quick delivery when ordering their groceries online.
Fabric is a leading provider of micro-fulfillment solutions for urban warehouses, based in NYC. According to their COO Steven Hornyak, retailers can expect a payback period of 2 – 3 years when using this technology. The consulting firm Chainalytics has estimated that retailers typically spend $10-15 per online order when their warehouses use manual picking, but this drops to $3-5 per order with automation.