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Online Sales Leading Toward Smaller, Urban Warehouses

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CBRE Inc. says retailers are looking at distribution centers close to e-commerce consumers, spurring demand for warehouses in urban areas

Amazon.com is leading a drive toward the use of smaller warehouses closer to urban centers as rapid delivery gains importance in e-commerce sales.

Amazon.com is leading a drive toward the use of smaller warehouses closer to urban centers as rapid delivery gains importance in e-commerce sales. PHOTO: BLOOMBERG 

In a report to be released next week, analysts with real-estate brokerage firm CBRE Inc. say demand for existing industrial structures under 200,000 square feet and located in the midst of high-population urban zones could soon go up. Companies aren’t necessarily turning away from sprawling distribution centers far from urban centers, said David Egan, CBRE’s head of U.S. industrial research, but are adding more sites as they roll out speedy and even same-day delivery.

“You need to expand and make your supply chain much more complex if you want to be able to promise and deliver on that same-hour, same-day or overnight delivery everyone is coming to expect,” Mr. Egan said.

He said CBRE has seen strong growth in industrial real estate coming in smaller deals. “No longer is the entire market driven by the 500,000-square foot and above user,” Mr. Egan said.

Amazon.com Inc. is leading the trend, CBRE found. The Seattle-based company, long focused on big facilities spaced relatively far apart, started building a network of small service centers in and around London in 2013, and then took the strategy to the U.S. As of June, Amazon had 19 small spaces active in the U.S. with several more due to open soon, CBRE said.

These smaller facilities are often older buildings in urban industrial zones. In e-commerce logistics, they function as a place to send orders from the big, more remote distribution centers, and prepare them for the “last mile” delivery to the customer or a store—which can involve everything from carriers like UPS to bike messengers or on-foot delivery people.

At these facilities, square footage and state-of-the-art machinery aren’t as important—it’s all about location, location, location.

CBRE researchers analyzed 44 neighborhoods with a high concentration of likely e-commerce shoppers across 14 major metropolitan areas, finding that rent and availability for “light industrial” space, as it is known, is currently most favorable in parts of Atlanta, Boston, Chicago and Philadelphia.

But, Mr. Egan noted, online retailers can’t always choose which geographic markets they want to sell to. If a company wants to offer speedy delivery, “they’re going to have to do it everywhere,” he said.

Adding distribution centers closer to the customer isn’t cheap—particularly the longer retailers wait. “When you add complexity, you add layers and you add more steps in that process,” Mr. Egan said. “With that comes cost.”

Still, unlike the tight market for large industrial spaces—which tend to be located further out from urban centers—there is more availability and still relatively reasonable rents for these urban spaces, CBRE’s research found.

Write to Erica E. Phillips at erica.phillips@wsj.com

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