Shipping Giants Are Furiously Building Warehouses Around A Handful Of Inland Logistics Hubs
As major U.S. companies seek to capitalize on international freight connectivity and industrial growth, many are zeroing in on Middle America over coastal gateway markets.
Millions of square feet of warehouses are under construction in Cincinnati, Fort Worth, Texas, and Memphis. What connects them? Airports with major cargo capabilities.
Amazon, FedEx and UPS have all announced multibillion-dollar expansions in these and other inland markets to capitalize on existing transportation hubs that connect to the world. Developers and e-commerce companies are now following the freight, spurring an industrial boom across the American heartland.
“One of the reasons we see so much buildup around these inland ports is it cuts down on transportation time and transportation costs,” said James Breeze, CBRE senior director and global head of industrial and logistics research. “Transportation costs are the highest costs for a supply chain, and any way occupiers can find to cut down on that cost they will, including building up around distribution centers.”
Memphis, home to North America’s busiest cargo airport by volume, has been FedEx’s corporate hometown since 1973.
Fort Worth Alliance Airport opened in 1989, when it was billed as the world’s first industrial-only airport. Amazon has named Alliance, already home to a FedEx regional hub, as one of its Amazon Air regional air hubs.
Cincinnati/Northern Kentucky International Airport may have been built to accommodate a high volume of passenger traffic but, following a drawdown of service from Delta Air Lines over the last decade, the Kenton County Airport Board has leveraged the existing runway infrastructure to land new cargo hubs from air freight providers like DHL Express and Amazon Air.
Freight companies are attracted to the markets due to their central location and land availability to scale up international operations. The cargo connectivity is now having a spillover effect in the industrial sector.
“We are seeing uniform demand increases around sites with compelling logistical qualities,” said Andrew Iglowski, the managing partner and co-founder of Boston-based industrial investment and development firm The Seyon Group. “Sites that are effectively junctions of product distribution are overtly strategic and less replaceable.”
Nike’s 2.8M SF Memphis distribution facility is the athletic company’s largest in the world. Other companies — like Williams Sonoma, consumer electronics company Technicolor and Amazon — have distribution centers in Tennessee's second-largest city.
About 7.5M SF of warehouses are under construction for companies looking to tap into Memphis’ rich distribution resources, according to a JLL Q4 report. The Tennessee city is also the third-largest inland U.S. maritime port.
“Memphis’ geographic location, distribution and transportation assets — namely runway, river, rail and roads — are the biggest drivers in [Memphis International Airport] remaining America’s Aerotropolis,” Memphis Shelby County Airport Authority President and CEO Scott Brockman said.
Wayfair operates a distribution center near Cincinnati’s airport, where air cargo has increased 53% since 2016. Nearly 5M SF of warehouses are under construction around the airport, according to JLL. The Kenton County Airport Board also plans to develop 350 acres of Cincinnati airport property — which is actually across the Ohio River in Kentucky — for commercial uses, given the demand from the cargo and industrial sector.
“Our Northern Kentucky region, especially the area near [the airport], is already a strong location for the manufacturing and distribution sectors,” a Cincinnati/Northern Kentucky International Airport spokesperson said via email. “The airport is working with regional economic development agencies to continue attracting target industries and businesses in the supply chain and logistics sectors.”
In Forth Worth, a 2019 land acquisition gave developer Hillwood the potential to build 36M SF around Alliance Airport. The Texas developer is particularly bullish on the Fort Worth acreage due to its location between Alliance Airport’s all-cargo facility and the BNSF Railway Alliance Intermodal Facility. Companies like Stanley Black & Decker and Callaway Golf have distribution and manufacturing centers around the Alliance.
“There are no commercial flights, so the takeoff line is significantly shorter at the airport,” Hillwood Senior Vice President Tony Creme said. “It’s why Amazon located their facility here. Every minute matters in today’s world of e-commerce.”
Industrial demand may be the highest in coastal markets with large populations increasingly expecting next-day or even same-day delivery, but the demand and population density also push land costs up. The market dynamics force industrial developers out, since they can't outbid apartment, hotel or office developers.
Industrial real estate sales in urban Boston averaged in the $50/SF to $90/SF range in the early 2010s before surpassing $150/SF in 2017. The 24 industrial trades occurring within a 5-mile range of central Boston last year traded for a median $174/SF, according to Cushman & Wakefield data. Tenants are also feeling the price sting of industrial demand. Warehouse rents in urban Boston have increased 42% over the last two years to an average of just over $12/SF, according to Perry data.
Even as New York industrial developers are forced out of Manhattan and large swaths of Brooklyn and Queens, warehouse values hit a 10-year high in the Bronx last year, and some landlords are asking for rents north of $30 per SF.
“In some of these major coastal markets, you’re running into a land and labor shortage,” Transwestern Western Regional Partner Stephen Batcheller said. “That pushes companies to look further and further out to find the land and labor resources they need.”
While inland markets may lack the population and income of Los Angeles, New York City, San Francisco or Boston, they have more available land at a significant value. Industrial rents in Memphis average just over $3/SF, according to JLL. In Cincinnati, warehouse rents average a little more than $4/SF. The price value and connectivity make the regions attractive to e-commerce distributors when many companies are looking to trim supply chain costs.
Logistics costs increased more than 11% in 2018, according to the Council of Supply Chain Management Professionals. Increased costs associated with trucking have made companies turn to alternative transportation hubs to reduce costs, Breeze said.
Developments happening close to the airfield are expected to fuel even more surrounding industrial growth.
FedEx is spending $1.5B to modernize its Memphis facilities, which process nearly half of the carrier’s overall daily package volume. The modernization plan includes a 1.3M SF sorting facility. UPS is expanding its Memphis International Airport facility by 266K SF as part of a planned $216M expansion.
Along with the Memphis expansion, UPS is also adding “super hubs” near existing transportation hubs in Eastern Pennsylvania, Tacoma, Washington, and Ontario, California.
“At UPS, we continually evaluate where and how to best expand our global logistics network to meet growing customer demand,” a UPS spokesperson said in a statement to Bisnow. “Proximity to our UPS air hubs supports end-of-runway express services like UPS Next Day Air and UPS eFulfillment that many e-commerce companies demand.”
Amazon, which no longer has a shipping contract with FedEx, has embarked on its own air freight service. Along with the company’s $1.5B Amazon Air hub under construction in Cincinnati and the regional hub in Fort Worth, it is also reportedly looking to add a hub outside Tampa.
Whether by air, rail or sea, transportation center expansion is expected to continue to be the catalyst for U.S. warehouse growth.
U.S. markets with the highest demand for new industrial space are near major logistics hubs, according to a February CBRE report. At 7.9%, Kansas City — home to the second-largest rail freight hub in the U.S. — had the lowest vacancy rate for construction completions last year. Nearly 20M SF of the 25M SF of Dallas/Fort Worth industrial completions last year was already leased, per CBRE.
“The closer your warehouse is to a port, rail or air hub, the closer the logistics facility is to the source of the incoming product,” Batcheller said. “It cuts down on time, which means it costs a lot less.”