ORANGE COUNTY, CA—The drive to deliver retailproduct to the consumer ever-faster—sometimes called the“Amazon effect,” is causing many e-commerce retailers to work towardfacilitating direct supplier-to-consumer transactions. This trendis increasing the demand for industrial realestate that brings these goods closer to the consumer, andit's creating some logistical challenges as theneed for industrial fulfillment space spoke with Mike Nelsen, chiefdevelopment officer of online merchandising and fulfillmentplatform CommerceHub in Albany, NY, andJim Linn, SVP investments for Illinoi-basedCenterpoint Properties' Southern Californiapresence. In Part 1 here, we discuss this demand and the impactit's having on commercial real estate. Stay tunedto for Part 2, in which we discuss some of thelogistical challenges this trend brings up and how the market ismeeting the demand.

| What are the implications of suppliersinvesting 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 startedwith the idea of product expansion—the idea of being able to offera lot of product—and on the heels of that they introduced theirPrime program, creating another perception change regarding whatconsumers should expect. Third, they introduced FBA, the “fulfilledby Amazon” program. To compete, retailers have started and hadstarted leveraging drop ship in the form of being able to expandproduct, 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 consumerquicker and cheaper.


There are two mechanisms in regard to that: paying for freightor expedited shipping, which is a very costly venture, or puttingthe products closer to the customer. That's the driver that comesinto play when it comes to real estate, the ability to leaseadditional space either in existing forms or via athird-party logistics provider.


Logistics have become sexy again. I was at the InternetRetailer Conference recently, and it used to be all aboutsearch, platforms, design and optimizing keywords for searchengines. This time, it was about 3PL companies andcarriers. There's a lot of logistics at play—it's just a symptomright now, not yet the trend, but it's absolutely trending inregard to where retailers and manufacturers will be looking. Theywill take products they already own and move some of them to a newfacility, build, lease or use a 3PL.


Linn: The investmentmarket for industrial real estate is extremelycompetitive, increasingly so, which is particularly attributable tothe effect of e-commerce. The disruption in the retail market isonly helping the industrial market. It's increasing occupancy,driving rents and causing investor demand for industrial realestate, particularly for logistically advantaged properties. Thereis a certain mentality for investing in logistically advantagedreal estate because long-term investors feel rental rates willprobably appreciate faster in that area. Shorter-term investors maybe looking for something else, but certainly from a long-termstrategy, this is the segment they like.

| Is this demand encouraging constructionof logistically advantaged properties?


Linn: Yes. There are two segments ofe-commerce real estate: the segment focused more on the InlandEmpire, where there is a combination of distribution andfulfillment centers of typically 1 million square feet or greaterbecause that's where the land is—you need 50+ acres for one ofthose facilities, which is difficult to find in other parts ofSouthern California—and the segment focused on infill markets,which will be smaller facilities (100,000 square feet to 300,000square feet). In an effort to decrease transportation costs andincrease delivery speed, e-commerce facilities will have to locatein the infill markets. I haven't seen this development happeningyet, but in 2015, we will see it.

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.