Linn: u201cThe investment market for industrial real estate is extremely competitive and getting more so.u201d

ORANGE COUNTY, CA—The drive to deliver retail product to the consumer ever-faster—sometimes called the “Amazon effect,” is causing many e-commerce retailers to work toward facilitating direct supplier-to-consumer transactions. This trend is increasing the demand for industrial real estate that brings these goods closer to the consumer, and it’s creating some logistical challenges as the need for industrial fulfillment space increases. spoke with Mike Nelsen, chief development officer of online merchandising and fulfillment platform CommerceHub in Albany, NY, and Jim Linn, SVP investments for Illinoi-based Centerpoint Properties’ Southern California presence. In Part 1 here, we discuss this demand and the impact it’s having on commercial real estate. Stay tuned to for Part 2, in which we discuss some of the logistical challenges this trend brings up and how the market is meeting the demand. What are the implications of suppliers investing in industrial real estate to remain competitive in the “Amazon effect” arena?

Nelsen: At the end of the day, is changing the perception of the consumer. It started with the idea of product expansion—the idea of being able to offer a lot of product—and on the heels of that they introduced their Prime program, creating another perception change regarding what consumers should expect. Third, they introduced FBA, the “fulfilled by Amazon” program. To compete, retailers have started and had started leveraging drop ship in the form of being able to expand product, their first line of defense in order to be competitive. With Amazon investing in distribution centers now, there’s a new layer of pressure to get products to the consumer quicker and cheaper.

There are two mechanisms in regard to that: paying for freight or expedited shipping, which is a very costly venture, or putting the products closer to the customer. That’s the driver that comes into play when it comes to real estate, the ability to lease additional space either in existing forms or via a third-party logistics provider.

Logistics have become sexy again. I was at the Internet Retailer Conference recently, and it used to be all about search, platforms, design and optimizing keywords for search engines. This time, it was about 3PL companies and carriers. There’s a lot of logistics at play—it’s just a symptom right now, not yet the trend, but it’s absolutely trending in regard to where retailers and manufacturers will be looking. They will take products they already own and move some of them to a new facility, build, lease or use a 3PL.

Linn: The investment market for industrial real estate is extremely competitive, increasingly so, which is particularly attributable to the effect of e-commerce. The disruption in the retail market is only helping the industrial market. It’s increasing occupancy, driving rents and causing investor demand for industrial real estate, particularly for logistically advantaged properties. There is a certain mentality for investing in logistically advantaged real estate because long-term investors feel rental rates will probably appreciate faster in that area. Shorter-term investors may be looking for something else, but certainly from a long-term strategy, this is the segment they like. Is this demand encouraging construction of logistically advantaged properties?

Linn: Yes. There are two segments of e-commerce real estate: the segment focused more on the Inland Empire, where there is a combination of distribution and fulfillment centers of typically 1 million square feet or greater because that’s where the land is—you need 50+ acres for one of those facilities, which is difficult to find in other parts of Southern California—and the segment focused on infill markets, which will be smaller facilities (100,000 square feet to 300,000 square feet). In an effort to decrease transportation costs and increase delivery speed, e-commerce facilities will have to locate in the infill markets. I haven’t seen this development happening yet, but in 2015, we will see it.