Ecommerce has “been a game changer,” Tina Arambulo, industrial research director of the Los Angeles basin at Cushman & Wakefield, tells GlobeSt.com. While the ecommerce sector, among many, has been a driver behind the tremendous growth in the Los Angeles industrial market, it is so much more than that. The ecommerce market has changed the market dynamics and even industrial development. To find out more, we sat down with Arambulo for an exclusive interview to talk about the real impact ecommerce has had on the market.

GlobeSt.com: How has ecommerce changed the L.A. industrial market?

Tina Arambulo: The online-based retail model pioneered by Amazon has had a huge impact on industrial real estate and has really been a game changer for the industrial sector. E-commerce also has a broader ripple effect that is providing a lift to suppliers, 3PL companies, and packaging firms. As the e-commerce industry continues to evolve, space demands are shifting as firms add more on the “last mile”. Both retailers and logistics companies have been occupying warehouses at a record pace due to increasing consumer demand for expedited delivery and the need for last-mile facilities to ensure online orders reach customers as quickly as possible. E-commerce companies and 3PLs have been gobbling up huge blocks of space and fueling new construction.

GlobeSt.com: When did ecommerce begin impacting the industrial market?
Arambulo: Since year-end 2012, more than 31 million square feet of industrial inventory has been absorbed, with a significant portion of that coming from e-commerce related users. The demand for last-mile infill distribution facilities is putting added pressure on markets where both available space and land are in extremely short supply. There is a significant amount of product that had been considered obsolete and not suitable for modern distribution use and e-commerce and 3PL firms are continuing to demand modern facilities with clear heights of over 32 feet. Yet, while demand for specialized new Class A product remains strong, there is also an increasing demand—depending on locational advantages—for older Class B product having lower clear heights, lower parking counts, lower door counts, etc. These adaptive occupiers are willing and/or needing to make tradeoffs in order to secure close-in last mile product.
GlobeSt.com: Has ecommerce changed the development style of industrial product?

Arambulo: Although industrial land remains limited and prices are high, strong demand for class-A product has resulted in a significant uptick in development activity across the region. In addition to 1.5 million square feet of new deliveries at mid-year, 8.6 million square feet remained under construction in the Los Angeles market, surpassing the previous development high of 8.1 million square feet at year-end 2000. New facilities are being designed to be more appealing to workers, with natural light and a more comfortable working environment. State-of-the-art buildings also mean more specialized requirements related to HVAC, slab specs, column spacing, and other infrastructure.

GlobeSt.com: Is ecommerce a major driver in the L.A. market, or the only driver?

Arambulo: Demand has been fueled not only by the explosive growth of e-commerce but also by strong port volume as well. The overall vacancy rate for the South Bay market, which is closest to the ports, dropped to below 1.0% at mid-year 2017. With a market this tight, it is very challenging for users, as options are limited and many are being forced to consider surrounding markets. Southern CA represents one of the largest consumer markets in the U.S. and trade and logistics are at the heart of the Southern California economy. The movement of goods is a vital component to the region's economic health and the region serves as a gateway for the rest of the nation as well. The largest freight forwarders in the world all have major operations in Southern California. They include DHL, Kuehne + Nagel, DB Schenker, Nippon Express, FedEx and UPS. As a major driver of demand for industrial real estate, the Southern California ports continue to post impressive numbers. This past July was yet another record breaker for the Southern CA ports. The Port of Long Beach had its busiest month in its 106-year history, while Port of Los Angeles had its biggest July in its 110-year history. When combining volume at both ports, total year-to-date volume is up 8.1% over 2016 and 2017 remains on pace to be a record-setting year.

GlobeSt.com: How are non-ecommerce users coping with the increasing rents and dearth of supply?
Arambulo: These are challenging times for non-ecommerce tenants in Southern California. With lease rates at historical highs and climbing, both for new tenants trying to enter the market and existing tenants hoping to stay, the market conditions have brought about shock and frustration. Many users, already operating on thin margins, are exploring moves to other markets including Inland Empire, Reno, Las Vegas and Phoenix. Traditional 3PLs are trying to negotiate customer contracts at higher numbers. Renewing tenants are initially threatening to move, but are often renewing since there are few or no alternatives. Some users are scaling back or shutting down altogether. Tenants want to sign shorter leases thinking that the market will peak, but landlords are demanding longer lease terms. The users who own their buildings are using the market to capture new business, somewhat immune to the record high rents. Is there a breaking point, a peak at which traditional tenants can no longer be profitable in this market? So far we haven't reached that point in Southern California. However, as e-commerce continues to expand its market share, we may see a complete transformation of the tenant make-up in Southern California over the next decade or so.

Instant Insights /

Ecommerce Isn't An Industrial Driver, It's a Transformer

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