McCrary: “What’s driving that
lift in square footages is the distribution

(Save the date: RealShare Industrial 2012 comes to The Bankers Club, Miami, December 5 – 6.)

ONTARIO, CA-A “dynamic shift in the consideration process of occupiers” from a decade ago is driving the industrial market toward the eastern region of the Inland Empire, away from infill areas toward open spaces that can accommodate the large footprints of fulfillment and distribution centers, says Jones Lang LaSalle’s EVP Mike McCrary. He tells that areas including the Moreno Valley, San Bernardino, Redlands, Perris, Riverside and Colton are seeing large industrial growth as a result of manufacturers’ and retailers’ increased online sales and the need for state-of-the-art fulfillment centers to meet their resultant distribution needs.

“We’re seeing an increase in the desired square footage of the [industrial] tenants, and one of the components is that there’s available dirt and the opportunity to build a one-million-square-footer in the eastern part of the Inland Empire,” says McCrary. “The western part of the Inland Empire—where Ontario was the epicenter—is becoming landlocked and an infill market, but there is a tremendous amount of growth happening in the eastern part.”

Companies being forced to compete with online retail giants like to get product to consumers within 24-48 hours of an online sale are making a huge impact on the transactional flow of the market. McCrary points out that because L.A. County is so dense, it doesn’t have buildings available to support this new distribution model, and the cost is much greater to build and rent than in the Inland Empire.

“There’s a new model in how people are looking at and buying product,” says McCrary. “We are all more accustomed to buying product online. We’re all well past the security issues and discomfort with the Internet. My prediction is that in the upcoming 12-18 months, we will see a similar shift in the food-and-beverage business whereby people will feel more comfortable buying food and beverages online. You’re going to receive everything from shoes to diapers online—why wouldn’t the grocers see that kind of growth, too?”

Some industry experts have reported that online sales of groceries have not matched those of other consumer goods because people still like to see, touch and experience these products before buying them. When spoke exclusively with Jim Lynch, the newly appointed retail practice leader/account manager of RiverRock Real Estate Group, in August, he said, “I’m not sure how successful online shopping has been for the grocery retailers, but just from watching in my own neighborhood, I don’t see those grocery-store delivery trucks very often. Shopping for groceries has remained relatively unchanged.” Still, McCrary believes this shift will come within the next couple of years.

McCrary also reports that the logistics companies are catching on to the new distribution model and are recognizing their responsibility to accommodate that need for their clients. Firms such as Kimberly Clark and Walmart are leasing fulfillment centers and hiring third-party groups to run the distribution end for them. “Manufacturers are saying, “Our core competency is finding product from a supplier, not really running the warehouse.”

Also, what were formerly traditional palletized warehouses that would ship to retail stores are now online fulfillment centers that are points of sale, necessitating a shift from the “guy running a forklift” or typical “pick-and-pack” warehouse personnel to educated logistics personnel with experience running a $20-million computer system in an air-conditioned building designed for distributing products to consumers’ homes. “The talent needs are greater, the wagers are higher, and the number of employees hired is more,” says McCrary. “The opportunity for cities to gain sales-tax revenue is greater.”

He adds that companies like Best Buy are shrinking their showrooms but leasing fulfillment centers, and cities are realizing that they’re no longer generating sales tax from a retail center but from a distribution center. “Cities are finding out that they need to re-embrace distribution centers because they’re offering a lot of economic stimulus to an immediate community. They’re a very good economic machine for a community.”