In 2017, newly signed bulk space deals in the greater Indianapolis industrial market totaled 10.2 million square feet. Of that total, over 50 percent had some affiliation with e-commerce.
With 26 new buildings and another 5.7 million square feet under construction, the Indianapolis industrial market will clearly become increasingly linked to the performance of e-commerce as the total share of online retail sales remains in a significant growth mode.
Projections by Cushman & Wakefield show that by 2020 nearly 12 percent of all retail sales will be associated with e-commerce — three times what it was 10 years ago. Stronger growth will be driven by the onset of e-grocery and e-pharma.
Additionally, e-commerce will continue to be a driving force in these industrial deals because the online industry is getting better at what it does. Coming off the strongest holiday season since the Great Recession, companies are now focused on the cost of package returns and are re-examining the value of brick-and-mortar stores.
When it comes to package returns, not only is the processing time significantly slower, but it is six times costlier to return a package using regular shipping methods. Returning items to physical store locations is the cheapest channel and fastest route to resale. With holiday online sales breaking $100 billion in 2017, the National Retail Federation projected total returns at nearly $32 billion from holiday sales alone.
Location is vital
Efforts to develop an innovative and strategic real estate portfolio are key to retailers. The focus has been on “first-mile deliveries,” where retailers position huge distribution centers to reach customers quickly across the country.
Now they are looking at using nontraditional practices to address the “last mile,” such as repurposing multi-story buildings in urban areas to help fulfill orders for the customer who expects same-day delivery.
Walmart is taking a similar strategy after announcing the strategic closure of select Sam’s Club locations. The leader in physical locations by a long shot is repositioning some components of its Sam’s Club portfolio to be geared more toward e-commerce.
Repurposing the former Sam’s Club locations into e-commerce centers will assist with last-mile deliveries, supporting the speed of deliveries to online customers. Walmart’s online sales are projected to increase by 40 percent in 2018, according to the company.
Companies get creative
With baby boomers entering retirement, there is a shortfall of 20 million workers among Generation X (persons born between 1965 to 1980). Filling the labor force is a national concern, more so than lease rates or any other issue. There are two fundamental labor problems that, when addressed, encumber one another.
First is the skills gap. Available workers who have the skills needed to step in and fill an open position immediately are difficult to find. Once this concern is addressed through training initiatives and undergraduate education programs, the second fundamental issue — body gap — comes into play.
What is body gap? As full employment is reached, companies run out of available bodies to sustain their growth. Indiana is addressing these issues with its Next Levels Job Initiative, designed to give adults skills needed to fill jobs in high-demand industries. Also, a grant for employers helps with training and retaining new employees.
Companies are being forced to be resourceful about how they generate more production. Robots, wage increases to essentially poach talent and relocating operations to smaller markets are all options companies are considering.
With the millennial labor force uninterested in warehouse/manufacturing roles, companies are looking at untapped demographics to fill job gaps including military veterans, physically challenged and habitually unemployed persons.
The lack of workers has created unique opportunities for submarkets that have not experienced significant year-over-year growth in previous years. Tapping into the veteran labor force works well for Indiana. With innovative services and training for veterans, the state has had the country’s lowest veteran unemployment rate, which was 1.8 percent as of 2016, the latest annual average provided by the U.S. Bureau of Labor Statistics.
Tax reform impact
The Tax Cuts and Jobs Act (TCJA) signed into law by President Trump on Jan. 1 is expected to result in a modest increase in consumer spending across most retail sectors in 2018. That’s good news for e-commerce. Underlying economic fundamentals were already pointing that way before the tax bill won legislative approval.
On the industrial side, the general consensus is that TCJA will be advantageous to commercial property owners, incentivizing corporations to put more money into real estate assets and new development. For example, FedEx Corp. announced a $1.5 billion expansion of its 2.4 million-square-foot express hub in Indianapolis over the next seven years due to the tax reform. Currently, the package-
handling operation is FedEx’s second-largest operation.
According to the Indiana Economic Development Corp., logistics companies such as HMD Trucking, UPS, Spot Freight and TPS Industrial Services are expected to invest more than $377 million and create up to 2,945 jobs this year. Indiana Governor Eric J. Holcomb’s Next Level Roads Plan is slated to invest more than $4.7 billion to improve roads over the next five years. This infrastructure system is key to supporting job creators in transporting goods.
With such significant investments, the Indianapolis industrial market’s remarkable run is expected to continue throughout 2018. Rents have risen significantly, resulting in a 4.6 percent year-over-year increase in total market rents during 2017, the most in 10 years.
According to Cushman & Wakefield’s National Industrial Forecast, the Indianapolis industrial real estate market in 2018 is expected to rank among the top 20 nationally for six of 12 categories measuring supply, demand and economic metrics.
— By Michael W.M. Weishaar, managing director, Cushman & Wakefield. This article originally appeared in the March 2018 issue of Heartland Real Estate Business magazine.