Sean Dalfen, Dalfen America: If You Want to Survive in Industrial, You Have to Be Close to Your Customer

Last mile industrial assets are, for lack of a better word, complicated. The economics don’t always make sense on paper, but you can’t deny that they are an essential, if not the most pivotal, part of the modern supply chain. This, according to Sean Dalfen, President of Dalfen America Corporation at CapRE’s Sixth Annual Northeast Industrial Real Estate & E-Commerce Distribution Summit in March, while serving on a panel titled The Last Mile: Ramifications of the Need to be Proximite to the Consumer in E-Commerce and the Impact on Infrastructure, Employment, Transportation.

“We’re one of the largest buyers of industrial in the country. All we do is last mile. We’re in 27 metros,” began Dalfen, prefacing his remarks with some context about his background.  “What we have seen is similar to what other panelists have had. The clear height is less important than location. Although, we focus on Class A and Class B facilities. Now it’s difficult to call a multi-tenant building Class A, for some reason. It’s not bulk. It’s not considered Class A. But from our standpoint, new vintage, high-bay product, that’s multi-tenanted, is Class A, though it may be considered Class B on a report.”

Then, getting right down to business, Dalfen shared that he and his firm are seeing increased demand throughout many markets in the U.S. “We are seeing rental growth rates of 15%, to up to 35% in some select markets,” he specified. “And we don’t see it ending.”

“I think that one difference between last mile and the rest of industrial — whether you want to call it last-mile or final-mile or even “urban logistics” — is that up until recently, this product was really not in demand,” he continued. “Institutions didn’t want to buy it. People didn’t want to build it, because it was too expensive. And the vast majority of product being built throughout the country has been built by merchant builders, or REITs. And it’s preferable for most of them to build 250k, 300k, 5005 or a million square feet, because it’s cheaper. They put it out there and they lease it quickly. To build in-fill, multi-tenanted product, is not something that traditionally made financial sense. And even today, with today’s rates, in many markets, it still doesn’t.”

However, Dalfen then shared that if you look at the costs of the supply chain, he would estimate that up to 95% of your costs are comprised of shipping and the movement of goods, labor, and inventory. “And only 5% is real estate. That’s a rounding error,” he remarked. “So if you want to be profitable – and I don’t call it e-commerce, it’s just commerce – it’s just the way that we do business today.”

“Manufacturers delivers directly to consumers today, and they never did before,” he clarified. “They’re skipping the middle man. You have people delivering to your house that you would have previously gone to their stores. And it’s about survival. If you want to survive, they have to be close to the consumer, because the shipping costs alone will outweigh any profit that they are going to make. So, the last mile has become of the utmost important in the supply chain, and those of us here that have last-mile products are going to see tremendous growth rate. And I don’t think that you’re going to be able to see much new supply, because there just isn’t land.”

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