CHICAGO–We all know the story about industrial's phenomenal performance in recent years: it is being fueled by e-commerce and the related consumer demands for speedy delivery. This is certainly true, but there is more to the story than that.

Retail — yes, brick-and-mortar retail — is also underpinning industrial's growth, according to a forthcoming report by Newmark Knight Frank. While that may seem counter intuitive at first, Greg Leisch, author of the report and senior managing director of Market Research for Newmark Knight Frank, has a simple explanation: As retailers rightsize and downsize they are relying ever more on just-in-time delivery from — you guessed it — last mile industrial facilities that can deliver product to the stores within a day's time or less.

“This trend has been just as much or more as transformational for industrial as e-commerce has been,” Leisch tells GlobeSt.com. Indeed, he points to a stat that is easily overlooked given current trends, which is that online sales are only 8% of all retail sales. Granted, the fact that a few years ago that percentage was much lower is a testament to e-commerce's growth. Nonetheless, “e-commerce has a fairly minor impact on trends compared to brick-and-mortar retail.”

Here it should be pointed out that JIT delivery is not new for retailers; just like their B2B counterparts they have relied on this process for decades. The difference is the extent to which they are relying on it now, Leisch says. “It has become more critical as retailers feel the pressure from online sales.”

Now, instead of having 60 of every SKU in a store, a retail might have only two or three. That puts a strain on the retailer's back end — its computer systems, its ordering and delivering — all of which means the warehouse needs to be as close to the store as possible for that last mile delivery.

Reshaping the Industrial Market

Needless to say this has benefited the industrial marketplace, Leisch says — but it is also reshaping it to a certain extent.

It uses to be that there were six major industrial hubs in the US. However with the advent of last mile — crucial, as we now see, to both e-commerce and brick-and-mortar retail operations — there are smaller industrial hubs developing in secondary and tertiary markets around the US.

“Denver, Salt Lake City, San Antonio, Raleigh, the Baltimore-Washington corridor — these all have large concentrations of customers and emerging industrial hubs that are benefiting from the last mile surge,” Leisch says.

Will Industrial Have A Capacity Problem?

All of this demand begs the question of whether the industrial market has enough capacity. That is easy to answer, Leisch says: no.

“We already have a need for more production of space, the pipeline is barely keeping up with demand,” he says. Last mile in particular represents a challenge because these warehouses are located in higher land-cost areas, closer in and oftentimes in areas that don't have permitted zoning.

“The national vacancy rate is less than 6% and that is essentially the frictional rate for occupancy.”

The answer of course, will be more demand. As rents rise higher and higher these land costs will be penciled in and more product will be built, Leisch says.

“Industrial has many years to run as a top performer of the five major food groups,” he says.

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Brick-And-Mortar Retail Is Affecting Industrial Too

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