Industrial Real Estate and E-Commerce: The Evolution of Warehouse/Distribution Space

CRE Finance World, Winter 2014

Industrial Real Estate and E-Commerce: The Evolution of Warehouse/ Distribution Space t is more than a decade from the rise of the internet in the 1990s, and e-commerce has officially become the boogey-man for the traditional retail industry. Retailers and shopping center owners around the nation cannot escape the fact that the industry’s landscape has radically changed and will continue to do so for the foreseeable future. Executives are hard at work incorporating internet retailing platforms within their firm’s existing structure, though some are finding the task far from simple. Property owners are consumed with managing the fallout, from the bankruptcies of major retailers a.k.a. empty space, and the trend toward smaller physical stores. The flip side of this narrative is the transformation of industrial real estate, mainly warehouse and distribution centers, due to the surge in online shopping. To solely focus on the effect that e-commerce has had on traditional retailing is to miss half of the story; internet retailing has turned the warehouse and distribution industry into a whole different animal. E-commerce is not only increasing demand for warehouse space, but changing the type of space that is in demand. The Ascent of E-Commerce Consumers have embraced the ease of browsing for merchandise and placing an order in the comfort of their own homes. Growth in e-commerce sales outpaced that of all retail sales in every quarter since the U.S. Census Bureau began tracking internet sales in the year 2000. Over the past few years, growth has slowed relative to the early and mid-2000s, but not because people are finding online shopping less appealing. In the early 2000s, the total amount of online sales was so small that even modest increases in sales activity produced stellar growth rates. Now that online retailing is so ubiquitous, steep increases in sales activity are required to generate the year-over-year growth of 38.5% recorded in Q3 of 2002. Moreover, all economic activity has been depressed following the latest recession, which has no doubt created a dampening effect on online sales. Recent growth in online retailing is still impressive. Online sales were up 18.4% year-over-year in the second quarter of 2013, which is the highest figure since before the recession. The share of all retail sales accounted for by online transactions also remains on a gradual upward trajectory, climbing to 5.8% of all retail sales in the second quarter from 5.5% in the previous period. In fact, the 30 bps quarterly increase is the largest since the early 2000s. CRE Finance World Winter 2014 38 Figure 1 E-Commerce and General Retail Sales Source: US Census Bureau However, the 5.8% ratio of online sales to total retail sales can be misleading. While 5.8% seems like a small percentage, it must be noted that several large categories accounted for in retail sales are not particularly suited for online purchasing. Gasoline, for one, is not likely to be purchased online. Groceries are also not well suited for online retailing, though several firms are attempting to make inroads into that potential market. On the other hand, e-commerce utterly dominates in other categories. Books, music, movies, clothes and many other product types can all be purchased easier and cheaper online than anywhere else, and e-commerce makes up the vast majority of sales in these categories. As distribution networks of online retailers improve and the markets for even more types of goods migrate to the internet, overall sales figures will continue to balloon. Additionally, while a company like Amazon exists entirely within the e-commerce sphere, at the other end of the spectrum are retailers like Walmart who have barely scratched the surface of what they could offer online. Walmart is starting to expand its online order fulfillment capabilities; the company signed a lease on a 1 million sf building in Bethlehem, Pennsylvania, its largest distribution center to date. It also opened a brand new 800,000 sf distribution center in Fort Worth, Texas. Prior to these facilities, Walmart had 130 distribution centers but just one dedicated to fulfilling internet orders. Retailers who have yet to fully take advantage of the e-commerce market present a major source of potential demand. I Brad Doremus Associate Reis, Inc. Ryan Severino, CFA Senior Economist Reis, Inc. Dr. Victor Calanog VP of Research & Economics Reis, Inc.


CRE Finance World, Winter 2014
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