Selling a blue sweater isn't as easy as it used to be. Retailers not only have to offer the latest merchandise at competitive prices, they now have to ensure speedier-than-ever delivery.
Online retail sales will hit $370 billion by 2017, said a Forrester Research report, vs. the $263.3 billion in 2013 e-commerce sales reported by the Census Bureau.
Meanwhile, with Amazon now collecting sales tax, it's triggering a race to provide same- or next-day delivery.
The result? Online and traditional retailers have been amassing enormous fulfillment facilities, sometimes larger than 1 million square feet.
"This is stimulating demand for the limited supply of high-quality industrial properties nationwide, especially in key port markets and high-density population hubs, enabling owners of existing 'high-cube' distribution spaces to raise rents and prompting the return of build-to-suit and speculative development," according to a July report from real estate investment firm CBRE.
Some 13.1 million square feet of warehouse or distribution facilities were completed in Q2, a 46% rise vs. a year earlier, according to commercial real estate research firm Reis.
New facilities are often necessary, as many older buildings cannot be converted into e-commerce-friendly warehouses with higher ceilings, more dock doors or more complex automation than older warehouses.
"They're functionally obsolete," said Reis economist Ryan Severino. "You can't just retrofit an old center.
These mega warehouses also hire hundreds of extra workers in addition to regular staff during the holiday season. In general, the work pays a little better than traditional warehouse jobs, Severino said, as newer technology requires more skilled employees.
While a few large retailers such as Macy's (M) own their facilities, even big players like Amazon (AMZN) have long-term leases from real estate investment trusts. Prologis (PLD), Blackstone Group (BX) and Liberty Property Trust (LPT) own a great deal of warehouses, said Severino. Other REITs include Stag Industrial (STAG) and Chambers Street Properties (CSG), which went public in 2013 and owns six Amazon facilities in the U.S. and abroad.
Cities with access to rail and air transport, such as Chicago, Atlanta and Dallas, are popular areas for development. So are port markets such as central New Jersey and Southern California's Long Beach.
The Inland Empire, a longtime warehouse center for the Long Beach/Los Angeles ports 75 miles away, is seeing a new boom .
"More than 16 million square feet is under construction in the Inland Empire, accounting for approximately 14% of all industrial space being built in the U.S.," reported CBRE. "Of the 34 projects under construction, 29 of them are at least 100,000 square feet in size, many of which are specifically designed to handle e-commerce order fulfillment.
Amazon said Thursday that it will open another fulfillment center in the Inland Empire. The Internet giant already has almost 5 million square feet in fulfillment space since it opened the first of its five California sites less than two years ago.
But its push is nationwide.
"Amazon has launched an aggressive build-to-suit strategy, opening 27 new fulfillment centers across the U.S. since 2011, with eight of them, totaling 7.7 million sq. ft., coming on line in 2013," said CBRE.
Brick-and-mortar retailers have been expanding their fulfillment capabilities to try to keep pace. Pennsylvania and New Jersey are seeing rapid development as East Coast versions of the Inland Empire.
Nordstrom (JWN) announced at the start of the year that it would open a third center next summer to expedite its website, mobile app and catalog orders. The 672,000-square-foot facility in Elizabethtown, Pa., will employ around 400 workers.
"The fulfillment center in Elizabethtown is within two days of 45% of the U.S. population and just a few minutes down the road from the largest UPS (UPS) ground sort facility," Nordstrom Business Public Relations Director Dan Evans Jr. told IBD via email.
Wal-Mart (WMT) is opening a more than million-square-foot facility in Bethlehem, Penn., that will be its biggest yet.
"What's the next phase?" asked Rene Circ, a research director at CoStar Portfolio Strategy.
If Amazon wants to ensure efficient same-day delivery, he said, it will have to start leasing smaller, 200,000-300,000-square-foot buildings that are closer to major hubs than its massive fulfillment facilities.
Macy's has built four fulfillment centers since 2007 — three of them close to or above a million square feet. It's developing a 1.3 million-square-foot "mega center" in Tulsa, Okla., that will employ about 1,500 full- and part-time workers.
Macy's also has rolled out shipping facilities in every single store as part of its "omnichannel strategy," in which online and in-store sales are seen as one and the same.
"Even if we know that the store you're standing in doesn't have that size 12 blue sweater, we might have 20 of them (elsewhere)," said Jim Sluzewski, a Macy's senior vice president.
Each in-house shipping center requires only 100-150 square feet, he says, and mostly consists of "a couple of tables and a printer and a desktop computer." So if a customer can't find that blue sweater at his local store in Los Angeles, Macy's runs an inventory check to figure out best location from which to ship the item, whether it's a fulfillment center in Tennessee or another Macy's store two states over.
Despite the added shipping cost, said Sluzewski, this process helps overstocked stores avoid having to discount merchandise.
"Retailers' ultimate concern is that they just want to make a sale," Severino told IBD. "Retailers wouldn't mind using their storefronts as facilities if they can pull that off."