Going the Last Mile: Q&A with the CIO of Dalfen Industrial

BY MIKE CONSOL WITH SEAN DALFEN

With the vast expansion of ecommerce and efforts by online retailers to offer convenience and immediate gratification to their clients, same day or next day deliveries have become critical in competing with traditional retailers. Traditional retailers, meanwhile, have joined the fray, with same-day or next-day pickups at their brick-and-mortar locations.

This has created a tremendous and growing demand for last-mile warehouse facilities so product deliveries can be made promptly and economically. Warehouse operations have found themselves battling for the best close-in locations with access to dependable transportation routes and other infrastructure services.

One of the executives working to fill the demand is Sean Dalfen of Dallas-based Dalfen Industrial, which owns and operates more than 25 million square feet of warehouse space around the United States.

What is last-mile warehouse in terms of distance or delivery time?

Last-mile industrial is nuanced relative to the specific market and tenant. Given important dynamics such as infrastructure, traffic patterns and population density, as well as other factors, analysis is used to help determine the ideal last-mile location for each specific market. What is last mile in San Francisco or New York will contrast with last mile in cities such as Dallas or Atlanta. Supply chains differ per tenant, and while tenant A may deem last mile to be seven miles in Miami, another may achieve their needs within 25 miles; a tenant who is heavily embedded in ecommerce usually views this through a far finer lens than a tenant in manufacturing. The critical element is, of course, being proximate to a meaningful population concentration and being able to service consumers in a rapid fashion. Consumer behavior has morphed from 10 or even five years ago where consumers today expect their online orders nearly immediately. It’s important to note that with suburban sprawl, last-mile locations aren’t necessarily proximate to a city center. In many instances, due to limited availability of existing properties or infill industrial zoned land, final-mile fulfillment centers may not be optimally located with the respect to the population they are serving. In any case, when posed with the question of “what is last mile,” if we were to generically quantify, we would say three to 20 miles and/or a 30- to 60-minute drive time to the end consumer.

What surrounding infrastructure is required?

I would categorize that in two buckets. The first is the same utilities you would need if building a house, with access to water/sewer, electric and roadways — otherwise the location could be prohibitively expensive to deliver those services. Second is having connectivity to various modes of transportation, including ports, intermodals, highways and airports. It’s also important to take into account traffic patterns, availability of labor, population density, among other factors.

When does it make more sense to buy or repurpose an existing facility versus build one?

As a general rule, it makes more sense to build when demand outstrips supply and prices on existing assets lacking modern design features are higher than replacement cost — provided well-positioned land is available for construction. Extensive repurposing of existing older properties makes the most sense in markets that have extremely low vacancy, are very dense, have high barriers to entry and where the few remaining land tracts are excessively expensive. In these cases, it’s almost entirely a location play, as long as you can ensure the property can be reconfigured to maximize functionality. Tenants will make do without the ideal property specifications because they simply don’t have a choice if they want to service the market quickly and effectively. With the rapid ascension of rents, repurposing assets in these high-demand, land-constrained markets is becoming more viable than in the past.

What factors are taken into account when assessing a location or facility?

When evaluating an investment, it’s important to assess properties through a top-down/bottom-up approach. In short, this means determining the best locations and then finding the properties within those locations that meet the criteria. Some type of location assessment analysis should be used to determine the best locations within a specific market for a last-mile facility. Some of these variables include proximity to key infrastructure; connectivity that affords access to both the population, population density, workforce analysis, traffic patterns, demographics, amenities, etc. In terms of existing properties, factors include but are not limited to vintage, clear height, sprinkler system, ample loading, proper circulation, parking, trailer storage. If the location and property meet the criteria, then the investment merits can be considered.

How big is the current demand for last-mile facilities?

The demand for last-mile facilities stems almost entirely from the fact that the movement of goods, in terms of supply-chain costs, accounts for 45 percent to 75 percent, and the last-mile component is roughly 53 percent of that cost. That means if you aren’t close to your consumer, you simply can’t profit if you are delivering single units within a quick time frame. Given that real estate is the smallest supply chain cost variable at 3 percent to 6 percent, it’s not a surprise that rental rates continue to spike. The magnitude in the shift from brick-and-mortar retail to online retail continues to generate demand. In 2020 alone, online sales grew more than 30 percent year-over-year. Some of that is attributed to COVID serving as an accelerant, but the shift in consumer behavior started well before COVID and has led to record absorption levels in nearly every market. Across the United States, 2021 net absorption is expected to total in excess of 300 million square feet, shattering peak levels. Forecasts are calling for an incremental 125 million to 150 million square feet of demand per year for the next five years, which will by all accounts outstrip supply. Another demand driver is the shifting supply chain. Many manufacturers and retailers were exposed during COVID as well as the recent turmoil at major ports. The paradigm of just-in-time inventory is going by the wayside, creating the need for more facilities to hold inventory. In addition, many manufacturers are now selling directly to consumers, bypassing retailers entirely.

What are the biggest impediments to finding and closing a deal on a last-mile property?

The biggest impediment to closing a deal today is the availability of third-party vendors. There appears to be a shortage of personnel in these service providers and getting them to complete things like surveys and zoning reports in a timely manner has become increasingly problematic.

How do you expect the process or property type to change over the next five to 10 years?

We expect higher clear heights, more trailer and yard space, and more automation in future facilities.

https://irei.com/publications/article/going-last-mile-qa-ceo-dalfen-industrial/

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