How E-Commerce is Shaping the Future of U.S. Commercial Real Estate

The following is adapted from Industrial Intelligence.

When Amazon first opened its virtual doors in 1994, it was mostly a way to buy books online. Boy, did that change! Since then, they’ve not only led an army of smaller online stores to create a retail category called e-commerce, they’ve become the dominant force in the entire retail industry. 

Today, most customers prefer e-commerce over traditional brick and mortar stores. As a result, a structural shift has occurred in the industrial real estate arena. If you’re staring down the prospects of buying or leasing an industrial property in today’s market, you should know how e-commerce is shaping the market.  

To start with, understand that e-commerce can be broken down into three activity segments: omnichannel, last mile, and reverse logistics. Knowing a little about each will help you to understand how they will impact your next commercial real estate decision.

Omnichannel

Some retailers have wisely chosen to have an online presence while maintaining their physical space. Best Buy, Nordstrom, Target, and Walmart are just a few examples of companies that have chosen to cover their bases. These companies have an omnipresent channel strategy.

By having an omnichannel presence, customers have ultimate flexibility. If they want to visit a store to get a tangible feel for the product choices, they can do so. However, if they know what they want and prefer the convenience of “adding to the cart,” they can do that as well.

An interesting blend of online and brick and mortar can be achieved by purchasing the product online and scheduling for an in-store pick-up, or curbside pick-up. Omnichannel gives retail customers an unprecedented level of flexibility. 

As a result of omnichannel flexibility, today’s shoppers have higher expectations, increased spending habits (based on sheer availability) and more brand loyalty. This shift in consumer behavior has led to changes in retail store size, location, and orientation.

Additionally, distributors must find warehouse space closer to their customers and replenish their physical stores at a more rapid rate to keep up with demand. 

Last Mile Fulfillment

The “last mile” in the e-commerce world refers to the point at which a delivery driver picks up a product from a distribution center and drives it to the consumer’s house, a retail location for pick-up, or a place of business.

Amazon has truly changed everything in the retail world. It’s no longer good enough to have distribution centers located close to retail locations. They also have to be within reasonable driving distance of residential neighborhoods. It’s the only way to compete with a company that can deliver a product to a customer within one day.

Reverse Logistics

All this convenience for the modern shopper sounds like a wonderful trend, but what happens when something is the wrong fit, size, color, or just doesn’t work like it should?

Twenty years ago, the customer would need to get in the car, drive to the store from which they bought the product, provide a receipt, and ask for a refund. Today, the customer can still do that, or they can ship the product back to the online retailer.

Reverse logistics is the process by which online retailers handle return items, and it is key to the success of any e-commerce business. Research shows that customers are three times more likely to return products they purchase online versus ones they purchase in person at a retail store. As a result, e-commerce businesses need 20 percent more space to manage reverse logistics compared to retail stores.

What Does This Mean to You?

What if your company is not involved in e-commerce? What if you run a diagnostic laboratory, an aerospace manufacturing company, or a construction company? Countless businesses do not sell anything online. They do not ship products to stores or houses, and they never will. 

However, all companies will feel the effects of the increase in industrial demand, due to increasing competition for all suitable warehouses and a corresponding increase in lease rates. During each year of the last economic expansion, lease rates have increased an average of 7 to 10 percent per year.

E-commerce isn’t going anywhere. In fact, it’s expected to grow for the foreseeable future. Understand its impact on your company’s real estate. Simply being aware of how ecommerce has affected lease rates may steer your purchasing decisions in a different direction. 

Maybe buying is better than leasing? Maybe leasing is still the best choice, but less space is needed? Maybe more space is needed? Think carefully about how e-commerce is shaping the market before you buy or lease your next industrial property.

For more advice on how e-commerce is shaping the U.S. commercial real estate market, you can find Industrial Intelligence on Amazon.