The year 2020 is sizing up to be one of the greatest years of change in the 21st century. As we slowly emerge from three months of “shelter in place” and “lockdowns,” we are seeing tremendous upheavals in consumer demand for products, and this is causing major changes in how products are made, packaged, and delivered to the US consumer.
As everyone knows, Amazon has benefited greatly from the COVID-19 shelter in place restrictions. We see their trucks drive through our neighborhoods daily. Consumers have recognized the convenience and safety of having products delivered to their front doorstep rather than having to shop and carry these products home by themselves. For the months of March, April and May 2020, e-commerce sales were up 50% from the prior 2019 period. Even if this cools a bit, and 2020 e-commerce sales increase just 20% year over year, we expect this will result in an additional demand for warehouse of 1 billion square feet nationally.
The supply chain model has dramatically changed due to e-commerce and consumer expectations of same-day or next-day delivery. The old models of a decade ago attempted to service the country with between two and five very large national warehouses. Using the old model, we might see a large warehouse in perhaps Pennsylvania, another in the Chicago area, and maybe one in the Los Angeles inland empire, all in the 750,000-1,500,000 SF size range. Today, if a company wants to provide same day delivery to customers, it requires a LOT more warehouses, or distribution nodes. To serve 90% of the US population with same-day delivery (truck trip of 150 miles or less, or 2 ½ hour drive) requires 33 warehouses throughout the country. E-commerce has accelerated demand for warehouse space in secondary and tertiary markets throughout the US.
Besides the much higher number of distribution nodes that e-commerce requires, there are two other significant changes to the supply chain to keep in mind. First, not every warehouse is shipping directly to consumers. The e-commerce model is more analogous to a tree, with a main trunk, large branches, smaller branches, and finally the leaves. We see large regional distribution centers shipping to medium size centers serving an MSA, and then smaller centers perhaps just serving a portion of a large city. This means even warehouses as small as 10,000 SF have a place in this new supply chain model. Second, the “just in time” inventory model, where everything was based on maximum efficiency, is being changed to a “just in case” model that can accommodate surges in demand based on factors such as weather, natural disasters (wildfires, earthquakes, hurricanes), and even political changes.
For the above reasons, we see warehouse demand to continue to be very strong on a national basis, especially in more densely populated areas. Old models were based on cost minimalization. The new supply chain models are based on nimbleness, flexibility, and closeness to the consumer. Opportunities abound for both smaller urban infill locations as well as large industrial land tracts for regional distribution centers. The e-commerce business is still highly fragmented beyond the leading e-commerce provider, Amazon. It’s safe to say, the rapid changes brought on by COVID-19 in consumer behavior and demand will greatly affect the supply chain logistics industry for years to come.
