E-Commerce is Driving the Industrial Real Estate Market

We’ve all heard about recent retail store closings at successful companies such as Kohl’s, Macy’s and Walmart. A major reason for this is the shift from brick-and-mortar stores to the growth of e-commerce as a result of omni-channel marketing and distribution.

In fact, according to an NFI Industries article entitled, The E-Commerce Effect on the Commercial Real Estate Industry, “In 2014, e-commerce sales for United States retailers surpassed $300 billion for the first time, reaching $304.9 billion, which was a 15.40% increase in comparison to the previous year and is the fifth year in a row that web sales growth has been close to or above 15%.... With companies offering same-day delivery, gift wrapping, ship-to-store and other e-commerce advantages, consumers are opting to do more of their shopping online. As e-commerce continues to grow, industries like commercial real estate are adapting to offer more ideal solutions to support e-commerce goals. E-commerce has shifted what companies look for in their real estate facilities and has evolved what is now expected in today’s fulfillment centers.”

One doesn’t often think about the intersection of supply chain management and real estate, but the relationship goes back a long way in the distribution and warehouse function, and now with the shift towards e-commerce, it is more important and visible than ever before.

In fact, regional distribution facilities are the most common property type in the U.S., comprising well over 60% of the U.S. industrial inventory and the majority of industrial REIT portfolios, according to an article in Wealth Management Magazine.

The article goes on to state that e-commerce retailers use logistics real estate in ways that require more space. Many activities that were typically carried out within stores are now consolidated into logistics facilities, and e-commerce customers just need more room… as much as three times as much logistics space—or more—as their brick-and-mortar counterparts.

So, as the NFI article points out, and is true in general, the “location decision” now more than ever is a strategy that shouldn’t be taken lightly and can be looked at in terms of:

Sourcing —An organization must decide if they plan to fulfill e-commerce orders from the store, a distribution center (DC) dedicated to fulfilling e-commerce orders with a separate DC dedicated to their stores, or one DC that fulfills both the e-commerce orders and replenishes store inventory. In many cases, companies may choose to have a combination of these methods.

Location—In many cases with e-commerce, it is important to reach most consumers in the least amount of time due to the requirements of overnight or even same-day shipments. So there has been an increase in the amount of retailers headed toward urban hubs like New Jersey, Lehigh Valley and southern California which are near major metropolitan areas. It is also critical to consider labor availability in the area, especially during the holiday season.

Develop or Adapt—The type of facility you choose can depend on your business objectives and specific current and future needs (often customized), which may push the decision towards either a new building or finding an existing building.

Design—E-commerce has specific and different requirements than traditional DCs such as they may be more automated but still require a vast amount of labor for “pick and pack” vs. “pallet in, pallet/case out” traditional DCs with a high variety of items.

Each company needs to determine its own needs for capital investment, length of commitment and anticipated rate of change in its business to determine their particular e-commerce real estate strategy, but there is no denying that e-commerce is driving the need for industrial real estate and is now a critical part of the competitive and location strategy of many companies today.