Logistics Infrastructure Unprepared for E-Commerce

As the consumption economy shifts from brick and mortar retail to e-commerce, states that do not invest in improvements to infrastructure will lose ground in economic development, according to a new paper.

Logistics Infrastructure: Transformational Opportunities,” released by the Alabama Center for Real Estate at The University of Alabama, highlights the importance and impact of logistics infrastructure on the “why” and “where” decisions for commercial real estate.

“The evolution of an e-commerce economy in which economic and commercial real estate development follow the logistics more so than cheap labor means the economic stakes have never been higher in a post-WWII era,” according to the paper’s authors K.C. Conway and Stuart Norton.

Conway is the director of research and corporate engagement for ACRE, which is within UA’s Culverhouse College of Business, and Norton is the research coordinator at ACRE.

The logistics infrastructure needs are compelling, with 4.1 million miles of public roads requiring maintenance, 1.2 billion hours of annual delays for the trucking industry, a 17-fold increase in annual spending required to maintain railroads, and e-commerce warehouse demand growing from less than 5 percent of industrial leasing a decade ago to 20 percent today.

“The shift from shop-and-take-home to online-order-and-deliver is the convergence of retail and industrial real estate,” said Conway. “What does it need? What does it rely on?”

A horseless-carriage supply chain from the 1950s cannot support a modern e-commerce supply chain that is growing 25-30 percent per year because the age and state of current infrastructure is inhibiting future economic and real estate development, according to the researchers. This forces existing industry to relocate toward destinations that have modern logistics infrastructure, or LI. Retail, distribution and manufacturing businesses are at risk of leaving cities and states that don’t invest in LI and update aging infrastructure.

The ongoing shift toward online retail will result in fewer physical stores, with the tradeoff being many new fulfillment centers and warehouses aligned with new LI. Statistics show e-commerce fulfillment centers will displace one-third of America’s 1,100 malls in a few years.

The development metrics by the major commercial real estate brokerages suggest a boom is ahead for new industrial warehouse development due to e-commerce. Demand still exceeds supply resulting in another 800,000 to 1 billion square feet of new development across the U.S. over the next three years.

With the double-digit annual growth rates for online retail, highways and interstates are too one-dimensional to meet the needs of an online economy. A new type of multimodal supply chain including ports, rail and intermodal will define the logistics infrastructure.

However, reliance on the federal government to fund LI for port projects, rail, intermodal or needed supply chain components is too lottery-like a strategy to fund our economy’s circulation system, the researchers indicate.

“Of the billions of dollars available annually to fund our ports and inland waterways via the Harbor Maintenance Trust Fund, only 10 percent of yearly balances are distributed to ports,” according to the paper.

States are on their own to invest in a modern logistics infrastructure. As the capital for logistics infrastructure investment moves toward ports that have diversified from principally bulk cargo, the time has come, the researchers said, to rank our North American ports based on a more dynamic method than the current single variable of 20-foot equivalent unit container count.

Conway and Norton recommend a new model incorporating factors like port depth, Class I rail connectivity, number of PPMX Gantry Cranes, and usage by shipping alliances.

A preview of the paper can be viewed on the ACRE website. The full 60-page paper is also available for purchase on the site.

This paper is the first in an annual series from ACRE on topics that impact Alabama’s real estate industry at large and the broader Southeastern region of the United States, including the vitally important Gulf Coast.