Tompkins: “Fulfillment requires a much different location, operation and size than distribution does.” Tompkins: “Fulfillment requires a much different location, operation and size than distribution does.”

DALLAS—E-commerce and shifting consumer buying habits are impacting where, what type and what size industrial real estate is being built, Tompkins International CEO James Tompkins, Ph.D., tells GlobeSt.com. Tompkins is delivering a keynote address entitled, “E-commerce Driving Industrial Opportunities” during NAIOP’s I.CON: Impact Projects conference here, April 5-6. We spoke exclusively with him about the topics in his keynote address, namely in what ways e-commerce is directly impacting industrial real estate and how developers can take advantage of these shifts.

GlobeSt.com: What are the main factors driving new opportunities in industrial real estate?

Tompkins: The main factor is logistics. If we break up industrial into offices, manufacturing and logistics, logistics is the one thing that is exploding and really hot. What’s driving logistics is the more-interesting question, and the answer to that is e-commerce. The requirements behind logistics facilities for e-commerce are drastically different than for in-store retail.

The biggest differences are where the facility is located. When you’re looking at in-store distribution as opposed to e-commerce fulfillment, you’re talking about shipping cases of products to stores vs. shipping a blouse, a pair of shoes and a necklace to Mrs. Smith—the latter is direct to consumer. When you do distribution to stores, you want to locate out in some semi-rural area where land is cheap and space is plentiful, but in fulfillment it’s the exact opposite. You want to be close to a major MSA so you are close to where the product will be delivered. You want to “GL” or “get local” with inventory and deliver within a short amount of time. We’re talking about fast delivery vs. short delivery so it gets there quicker.

Amazon can handle delivery to a substantial portion of the US—some 30% of Americans can get same-day service from Amazon, and this percentage is increasing on a daily basis. Where we are in fulfillment is in some city close to where people live.

It’s also a different process. When you’re picking boxes to be delivered to a retail store, the level of automation is quite low, but when you’re picking “eaches”—one item here, one item there to be delivered to the consumer—each pick requires greater automation and three times as much space. Fulfillment requires a much different location, operation and size than distribution does.

GlobeSt.com: How are consumer buying habits expected to change in the foreseeable future?

Tompkins: E-commerce is going to continue to have double-digit growth each year. That results in more fulfillment and less distribution. Also, what we see is that consumers are buying more on mobile devices than they are on laptops. In the old days—two years ago—when you bought things on your laptop, you sat down and ordered four different products at a time. Now, the tendency is much more to be buying products when on the go. You stop at a traffic light, pick up your mobile phone and order a new saw from the Home Depot site. Then, 15 minutes later, you stop at another light, pick up your phone and order a new hammer. And so on. The labor required to pick four one-line-item orders is much more than the labor to pick one four-line-item order. We need more people to get the job done, which requires more space and other resources. The other aspect to this is, when the consumer gets his tools, he doesn’t want to receive them in four boxes—he wants them combined into one box; this also reduces shipping costs. But it’s hard to figure out when you’re a fulfillment center, and it’s happening more and more.

Also, there’s more selection online than in a retail store. Your typical office-product store has more than 60,000 products on the shelf, but online the same company may have 500,000 items for sale. There’s lots more selection online because you can only fit so many items on a shelf. The selection requires more inventory, which requires more space; so, fulfillment centers are continuously demanding more space.

In addition, consumers are getting ornerier about how they want their order delivered. You don’t want the e-commerce company telling you how you want your order. So, we’re becoming much more customer centric, with much more personalization. When I go online now, they know who I am and suggest other products I might like. In general, we like the personalization. We do need to be careful not to get too “creepy” about it by getting too personal, but what was creepy three years ago may not be creepy today. To combat the problem of the single-line orders and enable them all to be delivered at once, fulfillment centers are recognizing how consumers are buying online today and are now waiting before processing single-item orders, just in case more orders come in that day from the same consumer. This technology is reducing the cost of delivery.

GlobeSt.com: What are the latest developments in distribution-facility technology and logistics, and how will they impact space demands in the future?

Tompkins: One of the biggest things that has happened, in addition to the extra space and personalization, is the combining of facilities. Walmart has distribution centers separate from fulfillment centers—that’s not good. The reason for that is because when they designed their distribution centers, they had never heard of fulfillment. A DC/FC—distribution center and fulfillment center—allows you to combine your inventory, and since DC inventory peaks at different times of the year, they’re busy at different times. For example, DCs need to send stores school inventory in July, whereas FC school inventory can be much later. This combines to flatten out the peaks, and the automation can be used interchangeably. Combining makes a lot of sense. You can even have a DC/FC/RC/LC, which combines distribution, fulfillment, returns and liquidations in one center; it’s much more efficient.

GlobeSt.com: How can developers take advantage of current industrial trends and position themselves strategically for the future of e-commerce?

Tompkins: These new centers require bigger buildings, and therein lies the opportunity for change in industrial real estate development. Developers have to get out in front of it because companies are notoriously underestimating the amount of space they’re going to need for e-commerce. It’s not necessarily who has the best building, but who has a building. Spec buildings may be spec because you don’t know who is going to be in them, but with the growth of e-commerce, someone is going to need them. Developers who have the buildings will win the game—it’s not a risk because there will always be demand, and it’s growing so rapidly that if the first guy who looks at a building doesn’t take it, the second one will be along soon.