Beyond Location: To Find Last-Mile Industrial Space, Investors Consider Many Variables
For an investor considering acquiring a new property, the asset's location is by far its most crucial deciding factor. That wisdom goes double for last-mile industrial properties — often the final stop before goods reach the consumer.
But as demand for warehouses rises and industrial space becomes harder to come by, industrial investors have begun to rethink what makes a warehouse location ideal. Investing in the competitive market for last-mile properties means thinking beyond just proximity to consumers.
“Each market is unique and has different variables to consider, from congested roads and density of population to demographic factors and the availability of quality infill space,” Dalfen Industrial President and Chief Investment Officer Sean Dalfen said. “Our top-down and bottom-up approach has allowed us to select what we believe are the optimal last-mile properties in the markets where we operate."
In order to choose last-mile properties, Dalfen said his team combines local market expertise and on-the-ground knowledge with a proprietary “last-mile score,” which is derived from analyzing a myriad of variables.
In a product's journey from a warehouse shelf to a customer's doorstep, the "last mile" of delivery is the final step of the process — the point at which the package arrives at the buyer's door. In addition to being a key to customer satisfaction, last-mile delivery is both the most expensive and most time-consuming part of the shipping process. Since transportation accounts for 45% to 70% of the costs in a supply chain, proximity is still the largest deciding factor from an investment standpoint, Dalfen said.
Because proximity is so important, delivery companies are increasingly using multiple small fulfillment centers around a single metropolitan area. That way, they can deliver more orders on a single, shorter route and pass transit savings along to their consumers. Driving time and congestion patterns around each particular city and submarket are critical components to consider in order to make a smart industrial investment.
As e-commerce sales continue to grow, being close to consumers is becoming even more crucial. Consumers are not only ordering more goods, they are also sending more goods back. The “reverse logistics” of returns are also increasing the complexity of a company’s supply chain. Unlike traditional last-mile fulfillment centers, reverse logistics centers tend to be less dependent on proximity to the consumer, since shipping time is of lower importance. But this may change as e-commerce continues to evolve and retailers begin to incentivize customers to return goods directly to their stores or warehouses.
In most markets, Dalfen said, suitable last-mile properties are typically located within a 3- to 10-mile radius of a targeted population.
“If your business is using same-day delivery and you're not close to the end consumer, then you're likely not profiting,” Dalfen said.
Absolute proximity was the impetus for Dalfen Industrial to purchase the Golden Glades Fulfillment Center, a 200K SF warehouse in Miami Gardens. More than 2 million Floridians live within 10 miles of the property. Amazon leases 40K SF and delivers roughly 47,000 packages per day from the property, often relying on Uber and Lyft to send out much of its inventory.
But proximity is not everything. For instance, Dalfen said, much of the same-day delivery destined for San Francisco actually originates out of Reno, Nevada, a location logistics companies have chosen for the availability of land, positive business climate and the depth and cost of its blue-collar workforce.
“Labor equates to 15% to 25% of overall supply chain cost,” Dalfen said. "With unemployment so low in today's environment, to get a warehouse worker to drive over 20 minutes to your facility will often translate into having to increase wages a dollar or more per hour."
Dalfen added that the average fulfillment center focused on e-commerce employs three times the number of workers as a traditional warehouse, so any wage increase can have an enormous impact on a company’s bottom line.
So while the need for proximity to consumers has been attracting investors into city centers, the need for a deep blue-collar workforce is also a critical factor, especially for larger more labor-intensive last-mile facilities.
In April, Dalfen Industrial purchased almost 46 acres in Mesquite, Texas, a few miles due east of Downtown Dallas.
“While the Mesquite market has 33M SF of industrial compared to 77M SF in South Dallas, the difference is, Mesquite has close to three times the workforce of South Dallas,” Dalfen said. “For a period of time, we saw a heavy vacancy rate in South Dallas, not just because of new inventory, but also because the workforce there was too shallow to support the need. Our research and market knowledge led us to the conclusion that Mesquite was an ideal location for a development due to both its infill location as well as its robust workforce.”
In addition to keeping track of all variables in major urban markets, investors need to keep up with local and federal regulations. In April 2018, the U.S. government began requiring all long-haul trucks to be outfitted with electronic logging devices. Like pilots, truckers now are legally allowed to be on the road for a limited amount of time. Logging devices ensure that these regulations are followed. In a single month, Dalfen said, the costs of long-haul transport jumped 28% industrywide.
“With the shortage of truck drivers, and as e-commerce continues to grow, it is widely predicted that transport costs will continue to rise over the next 18 months,” Dalfen said.
The last mile may not always involve bringing goods directly to consumers, but instead to logistics hubs or to large shipping companies — Dalfen called this a company’s “last touch.” He pointed to the Erlanger Fulfillment Center, a 288K SF project under development on 24.8 acres that Dalfen acquired in December.
The property is 2.5 miles from CVG, the airport serving northern Kentucky and Cincinnati. The CVG airport market has become one of the nation’s critical e-commerce locations. Erlanger is only 5 miles from Amazon Prime’s new $1.5B air hub. DHL and FedEx sort 90% of their U.S. domestic packages at CVG, and the airport is a hub for the cargo arms of numerous airlines including United, Southwest and Delta.
Dalfen stressed that while his company has a national footprint and has an in-depth, research-driven approach, real estate remains a fundamentally local game. When it comes to finding a specific property, he looks to the companies’ on-the-ground local market experts.
Dalfen Industrial's platform puts emphasis on acquiring and building high-quality assets in high-growth markets including Atlanta, Orlando, South Florida, Dallas, Denver and Phoenix, as well as high-density mature markets like Chicago. Dalfen believes that even strong national development will not be able to satisfy the market’s hunger for infill industrial space.
“The majority of the product being built today is bulk properties on the outskirts of major cities, and even though the demand continues to dramatically increase for last-mile locations there's simply a shortage of developable land and existing quality buildings in these areas,” Dalfen said. “Given the barriers to entry to develop new infill properties, we believe that we are going to continue to see substantial rental rate growth going forward.”
This feature was produced in collaboration between Bisnow Branded Content and Dalfen Industrial. Bisnow news staff was not involved in the production of this content.