Online Shopping, Highways Leading to Delaware Warehouse Boom | Delaware News

By BRANDON HOLVECK, The News Journal

WILMINGTON, Del. (AP) — In the largest buildings being constructed today in Delaware, nothing is made or sold. The need to store, sort and deliver products to customers is driving the state’s latest building boom.

It’s a trend nationwide as e-commerce continues its rapid ascension. A commercial real estate firm estimated the U.S. may need an additional 1 billion square feet of industrial warehouses by 2025.

The amount of space under construction at the beginning of this year in New Castle County alone exceeded the amount of space built in Delaware in the past 20 years, according to a report from Newmark, a real estate brokerage in Wilmington.

The roads surrounding the state’s highways are now dotted with beige, tan and gray boxy buildings several stories high and several football fields long. Their trucks hit the road carrying everything from food products to cardboard boxes to whatever you order from Amazon.

Dan Rattay, a senior vice president at CBRE specializing in industrial and office properties, said the demand for warehouses is “insatiable.” The pandemic accelerated changes in shopping habits, pushing more business from in-person to online, which will increase the need for warehouse space, experts say.

“We’ve never seen stuff like this before,” Rattay said.

The only problems are with supply. Today, companies are seeking larger spaces than in years past, and attractive sites near interstate highways are filling up.

Asking rent throughout the region is higher than at any point in the last decade.

‘IT’S NOT JUST PICK THINGS UP AND PUT THEM DOWN’

Warehouse workers at Dot Foods in Bear spend a typical day storing, picking and packing hundreds of items that are sent to customers large and small.

The food redistributor, which has operated a nearly 200,000-square-foot facility near Red Lion and Wrangle Hill roads since February 2020, counts everyone from US Foods and Gordon Food Service to local mom-and-pop shops as clients.

Dot Foods doesn’t manufacture any products itself. It exists to solve the problem of how to get something from point A to point B as efficiently as possible.

The operation is technology driven. Managers and warehouse workers reference handheld devices to understand what needs to go in each truck and to coax through the warehouse’s dozens of product aisles stacked some 40 feet high.

A screen in the break room shows each employee’s progress, tracked in real time.

“It’s not just pick things up and put them down,” General Manager Joe Little said. “How we store, how we rotate, how we pick for our customers — there’s some complexity to it.”

Little said customer orders have been “through the roof” since May when the region entered a “COVID reprieve.” Dot Foods has 187 Delaware employees. With business showing no signs of slowing down, the company is aiming to hire more drivers and warehouse workers. Its L-shaped building was constructed with expansion in mind.

A ‘FORGOTTEN MARKET’ TO AN OUTSIZED LEADER

The ideal warehouse location is near a population center and roads that offer easy access to that population. Companies like Dot Foods and Amazon want to serve as many customers as possible as quickly as possible.

Those considerations have made the Northeast a hotbed of industrial development. But until recent years, Delaware had been a “forgotten market,” Rattay said.

Companies opted for Pennsylvania and New Jersey because they had larger populations and ample space along the turnpike and I-95 in New Jersey and the I-78-I-81 corridor in Pennsylvania.

Some warehouse-seekers like Amazon, who built a 1.2-million-square-foot fulfillment center in Middletown in 2012, dabbled in Delaware. But by comparison, the state didn’t have many available sites that were suitable for large-scale industrial development and a comparable distance to the major eastern U.S. cities.

Over the past few years, because of the onslaught of activity in the market, the desired space in Pennsylvania and New Jersey has become harder to find. Developers have responded by turning to Delaware.

Three major purchases and ensuing developments are indicative of the changing tides of the state’s industrial market.

— In 2017, Newport developer Harvey Hanna & Associates acquired the former General Motors plant on Boxwood Road. It then sold more than half of the property to Nevada-based Dermody Properties. Dermody built a 3.8-million-square-foot warehouse for Amazon, which is scheduled to open in late summer or early fall.

— In 2019, Northpoint Development purchased 190 acres between the Delaware City Refinery and Route 7. The Kansas City company has plans for four warehouses on the property, including an already constructed 1-million-square-foot distribution center for DART Container, the maker of the red Solo cup, and a 577,800-square-foot facility for Amazon.

— In 2020, Stoltz Real Estate Partners of Pennsylvania acquired the former Blue Diamond Park near New Castle. They plan to build two warehouses, including a 1.2-million-square-foot Amazon fulfillment center.

If fully realized, the projects together will add more than 8 million square feet of industrial warehouse space to Delaware, representing roughly a quarter of Delaware’s current industrial inventory as counted by Newmark.

Involved in all three of those deals is Amazon. The e-commerce retailer’s sales soared during the start of the pandemic and have continued growing at an accelerated pace. Amazon is building both large fulfillment centers that will employ hundreds if not thousands of workers, as well as smaller stations that handle the final stage of delivery to customer’s doorsteps.

Why is the company building so heavily in Delaware?

“The customer impact that we can make for the Northeast,” said Will Carney, general manager of the Boxwood Road facility.

Dot Foods came to Delaware for the same reason. It’s in the right area to serve their customers and take costs out of their system.

The company’s Bear warehouses serve customers in southern Connecticut, New York, New Jersey, some of Pennsylvania and Delaware.

The number of available sites for warehouses — large and small — in northern Delaware is beginning to dwindle. Just as supply issues helped shift interest from Pennsylvania and New Jersey to Delaware, the lack of supply in northern Delaware is beginning to push interest to the southern parts of the state, which offer more space and the next best proximity to customers.

The recent construction of Route 301 in Middletown, which offers easy access to the Washington D.C. and Baltimore markets to the west and Route 1 and the I-95 corridor to the east, has increased Middletown’s appeal.

Multiple projects, including a two-warehouse development by Dermody at Route 301 and Jamison Corner Road, are in the works.

“The state of Delaware is strategically located in easy reach of the Northeastern U.S. population base, making well-located properties in the state excellent choices for logistics building development,” Gene Preston, east region partner for Dermody Properties said in a statement. Preston added that Dermody is “actively looking” at sites in Delaware, New Jersey, Pennsylvania, Maryland and New York.

Linda Parkowski, the director of the Kent Economic Partnership, said at least half of the inquiries she receives are regarding logistics use.

An analysis by Rockport Analytics in 2018 identified 1,882 acres of vacant commercial or industrially zoned land along the Route 13/Route 1 corridor between Smyrna and Milford. There were also 593 acres of only partially built-out development.

Rockport said warehousing and logistics, as well as health care and business and legal services should be targeted for the space. The challenge for southern Delaware will be improving its development infrastructure and reshaping zoning laws to speed the approval and building process, Parkowski said.

“We have industrial parks that are shovel-ready and we also have the available land,” she said. “We’re in pretty good shape.”

Many of the warehouse projects in Delaware are completed with state incentives. Among the highest grants, Delaware gave Amazon $4.5 million to establish its operations on Boxwood Road and awarded $3.9 million to Northpoint Development, the developer of the Delaware Logistics Park.

The money is tied to employment numbers and paid out over several years.

State officials argue the incentives are necessary to attract large employers who are being courted by other states. Many of the deals come through the Delaware Prosperity Partnership, a privately-run organization that recommends grant recipients to the state. The recommendation all but guarantees a deal.

“Incentives don’t create the jobs, they help create the jobs in your community,” said Kurt Foreman, president and CEO of Delaware Prosperity Partnership. “A company may choose your community because it makes the business case more attractive… We sweeten the pot a little bit, that’s one way to describe it.”

As much as e-commerce continues to rise, and with it the need for industrial space, brick-and-mortar retail continues to falter.

In recent years some of Delaware’s largest retail centers have lost anchoring stores such as Kmart and Sears. For landlords looking to fill the large spaces they leave behind, there are no clear replacements.

In Delaware and across the country, many have turned to “experiential” businesses — places like gyms, movie theaters and entertainment centers that necessitate in-person business — in hopes their traffic can transfer to smaller tenants.

But the pandemic has put that idea in peril too and some experts already doubted its long-term viability given at-home alternatives.

Another emerging strategy is to replace large commercial space with industrial, given the much greater demand in the market.

At least one mall owner in Delaware is considering that future. The city of Dover last month changed its code to allow the Dover Mall to pursue industrial use.

The mall’s owner Simon Property Group did not respond to a request for comment.

“It’s no secret to all of us that large regional shopping centers across the country are suffering, changing, going through a whole host of modifications and what have you,” Dave Hugg, director of planning and inspections for the city of Dover, said at a council meeting when explaining the code changes.

“It’s very unlikely that the Dover Mall will continue to function viably as a regional shopping center without being able to likewise take advantage of changes in customer behavior and new opportunities.”

Hugg said the mall is about 12% vacant, a relatively high rate largely attributable to the mall’s empty Sears, which hasn’t been filled since the department store closed in 2018.

According to Venkatesh Shankar, the director of research at the center for retailing studies at Texas A&M University, no U.S. mall has so far completely transformed to industrial.

Although mall values have come down in recent years, converting to industrial will cause most mall properties’ value to plummet. Mall valuations capture the value generated by the concept of the mall — anchor stores reel in traffic for smaller businesses — while industrial valuations come from the pure productivity of the facility, Shankar said.

To convert fully to industrial use “would mean admitting and accepting that this concept is gone,” he said.

The Macy’s at the Dover Mall is using its store as a quasi-fulfillment center. The store hasn’t had shoppers since last October. It’s instead being used to facilitate in-store and curbside pickup orders, returns, bill pay and other customer services, while acting as a fulfillment center for online orders.

In a statement, Macy’s spokesperson Carolyn Ng Cohen said the company has seen an increase in demand to get customers their products “when and how they want it.” Increasingly, shoppers are turning to Macy’s website or app and shipping to their nearest store. The Dover Mall Macy’s will operate as a “omni-service center” indefinitely to meet those demands, she said.

It’s more likely larger mall stores follow the lead of Macy’s and explore new formats that will shape the mall into a “makeshift” industrial center as opposed to a complete conversion.

The Tri-State Mall, steps from the Delaware-Pennsylvania border in Claymont, had years ago given up on the retail mall concept.

Today, six years after the mall closed to the public, its parking lot and much of the interior have been overtaken by pallets of wood, steel beams and other building supplies from an architectural company that leases the property.

The only active retail at the site is a strip center downhill from the mall’s former main entrance on Naamans Road, featuring a Save A Lot, Dollar General, a check-cashing service, a liquor store, a nail salon and multiple clothing stores.

But after years of anticipation and various failed proposals for mixed-use development, the Tri-State Mall will soon have a new life.

KPR Centers, a New York-based real estate company that purchased the Tri-State Mall in June for $12.5 million, intends to demolish all the buildings on the property and build a logistics warehouse.

Michael Hoffman, a land-use lawyer representing KPR Centers, said retailers haven’t shown interest in the site in the last 6-8 years.

“What we are seeing a lot of interest in, and it’s a tremendous amount of interest, is dollars being invested into logistics centers supporting e-commerce and the so-called new retail,” he said. Hoffman said KPR Centers has not made agreements with any tenants.

The site is adjacent to I-95 and as close to Pennsylvania as you can be in Delaware.

“When you have a site with proximity and access to transportation infrastructure, this is obviously an attractive location for a logistics center,” Hoffman said.

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