Impact of COVID-19 on Supply Chain Logistics and Industrial Real Estate

Consumer demands are becoming more sophisticated and complicated during a time when the nation is under a pandemic and the rules are changing, which, in turn, is putting increased requirements on the transportation of goods. Multiple purchasing sites are available – not just Amazon – faster shipping, free returns, some places who no longer accept returns due to COVID-19, a shortage in inventory due to high demand of products, all at a lesser cost, are examples of benefits and issues customers are increasingly expecting. Not only is the overall demand for goods shipped by trucks increasing, but the multiplicity of shipping service companies and consumer expectations are also becoming more complex.

All business sectors are feeling the effects of customer demands, as they substantially shape the shipping of physical goods. The transportation conditions within different regions can vary greatly, therefore demanding a unique supply chain strategy in every region that a company may do business in. The underlying factors from a real estate standpoint are: are where the product originates, where it’s being delivered and cost. This becomes critical in your operating business model.

One of the most complex and expensive components of the supply chain of retail is the “Last Mile,” representing the last and final leg in the process of transporting goods to a consumer. The most inefficient and expensive leg of the journey is the transfer of goods to the distribution center. It’s currently estimated that over 50% of supply chain costs are attributed to transportation. Rent only accounts for 4% of costs and can vary depending upon the decisions made around transportation models. Choosing an industrial facility or third-party logistics (3PL) company to house its goods has become one of the most important decisions a company can make. In order to make informed decisions to support the best logistics model for your business, valuable information relating to industrial warehouses and the primary mode of transportation infrastructure (highways) for transferring goods are critical factors for consideration.

The “Last Mile” is all about greater efficiency: better, cheaper, faster. Retail is forcing other e-tailers to keep up or lose market share. New creative ways are being implemented to reduce last mile costs through flex, return partnership and slower shipping options. Prime Now facilities are now smaller and located in urban areas. E-commerce is still a new concept to people, accounting for 70% of market penetration in the United States, but more e-commerce is on it’s with 55% expected growth increase over the next 4 years. Is our infrastructure prepared for this growth? What are the new considerations for industrial real estate? Network optimization is the most effective way of lowering external logistics costs. Research shows the U.S. to spend $2.4B of its GDP on infrastructure. Crumbling bridges, heavy traffic, crowded airports and highway erosion attribute to $3.9T loss in GDP.1

COVID-19 has not impacted the functionality of the warehouse. There are more e-commerce requirements but the architecture that is being placed into the office design is going to change rapidly. These changes include: a transition from low cubicles to higher cubicles/offices and reducing the amount of density. Spatial design is going to be a key element when considering layout options. A growing trend has also been the number of amenities that tenants desire within the building in the case of a build-to-suit, including: additional parking, fitness areas and break rooms that exit into large outdoor areas.

Density of Facilities

Height is critical, not just 32’, but multi-story warehouses. E-commerce facilities require up to 3x the density of traditional warehouses, as it is more of a volumetric analysis as well as providing as much flexibility for conveyor systems. There is a greater quantity of SKUs and more expensive urban locations (see: New Seattle Prologis 3-story warehouse and new Bronx 3-story warehouse). Naturally, higher is the trend as the cost of real estate in urban cores is so much more expensive. More dock doors are designed for smaller delivery trucks. Also, 24-hour access entail more security features to implement in the design. Less depth, faster turns and more associate parking are also required. How do you manage the cost? Take shorter distances from warehouses to customers; reduce delivery time/man hours; use smaller/lighter boxes when shipping; and utilize existing distribution networks.

For more information or to schedule a presentation with one of our industrial subject matter experts, please click on their name in the People section below.