Brick-And-Mortar Retailers Rush to Open More Fulfillment Centers As They Strive to Keep Pace in a Changing Landscape

Retailers Are Focused on Faster Delivery, Transportation Costs

In Seattle, Prologis Georgetown Crossroads is moving to open this fall in a neighborhood just minutes from downtown.

Sam’s Club plans to spend the coming months converting closed stores into distribution centers to fill online shopping orders, joining other national retailers in scrambling to grab up warehouse, industrial or even former big box store properties in response to the boom in e-commerce.

In another sign of a rapidly changing retail landscape, the rush to seize these properties is prompting developers to revitalize industrial areas across the country. Retailers are seeking to cut delivery times and transportation costs, raise their e-commerce capabilities and compete with a changing landscape driven by Amazon, which operates more than 300 distribution and delivery centers that process shipments from other parts of the country to get individual packages to the homes of shoppers.

Sam’s Club, a subsidiary of Bentonville, Ark.-based retailer Walmart Inc., opened its first of as many as a dozen e-commerce fulfillment centers in Memphis, TN, after announcing it would convert some of the 63 stores it closed earlier this year. It said other regions under consideration include Texas, Central Florida, the Mid-Atlantic, Southern California, the Chicago area and the Northeast.

"Transportation costs have always been there, but people are ordering more with e-commerce, and retailers need to get closer to the core," said Walter Byrd, senior managing director of Transwestern, a Houston-based commercial real estate firm. "The costs of real estate are nominal compared to the costs of transportation and labor."

This new method is taking hold as retailers and grocers struggle to remain relevant: A 2018 National Retail Federation survey found that 42 percent of retailers said faster delivery of online orders was their top priority.

Both Macy’s and Best Buy have opened several new distribution centers in the past year. Nordstrom announced July 10 that it plans to open three distribution facilities in Los Angeles, and Home Depot -- a retailer that trails only Amazon and Walmart in annual e-commerce revenue -- said it will invest $1.2 billion to pump up its supply chain.

Grocers are also adopting new strategies, particularly as they relate to Amazon. Kroger, the largest U.S. grocery chain, recently reported strong first-quarter earnings, driven in part by a recent partnership with Ocado, an online supermarket. Kroger is looking for space for about two dozen warehouses to fulfill online orders. It opened a fulfillment center this month in Kentucky to better serve its East Coast customers.

Walmart said July 10 it would open a fulfillment center in New York City for its Jet.com store to offer same-day grocery delivery. And Amazon, which is in both the grocery and retail businesses, is building fulfillment centers, the latest in Alabama and Oklahoma.

One-third of consumers ordered groceries online last year, according to research by Unata.

Developers are seizing opportunities. In Atlanta, McCraney Property Co. is planning a 610,000-square-foot park for users with fulfillment and freight-forwarding needs, according to a report by Jones Lang LaSalle.

In Seattle, Prologis Georgetown Crossroads will open this fall in a neighborhood just minutes from downtown. The three-story, 590,000-square-foot industrial warehouse features 410,000 square feet of dedicated fulfillment space designed for e-commerce purposes. The company is touting the development as "the first multistory warehouse in the United States" on its website.

"We’ve had exceptionally strong response," said Wilma Warshak, founding partner of Seattle-based Washington Real Estate Advisors, which is helping to market the property.

Such close-in properties will also dramatically cut rising transportation costs, said Transwestern's Byrd. A recent Hofstra University study noted that transportation accounts for half of overall expenses in a typical delivery supply chain.

Though industrial real estate costs are rising, second-quarter statistics from CoStar found that average rental rates of $6.67 per square foot increased 1.8 percent from the first quarter, Byrd said lowered transportation costs more than make up the difference, especially during the "last mile," or the final delivery of goods to the consumer's doorstep.