Industrial Real Estate is Exposed to E-commerce Headwinds


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Much has been written about the rapid growth of e-commerce over the past few decades, fueled by pandemic-related lockdowns on “non-essential” retailers in recent years. So it’s hard to believe that online shopping wasn’t always a safe bet. In the 90s there were doubts about the validity of the trend, even Amazon was dismissed as a pure book store. But once the infrastructure was in place to allow goods to be bought online and shipped directly to consumers, we spent more of our waking hours browsing web stores. Online shopping has exceeded most people’s growth forecasts. This new shopping channel was doing so well that some thought it would replace in-store shopping entirely.

If online shopping wasn’t already a global juggernaut, the aforementioned COVID-19 pandemic has pushed it over the edge. For more than a year, most people had little choice but to order almost all of their consumer goods online or hit the oh-so-important big department stores amid hordes of socially distanced shoppers. Not only was there an insane rush for toilet paper in Aisle Six, but retailers everywhere were ramping up their online ordering capabilities, which in turn was overwhelming storage capacity. Since then, almost every commercial real estate company has been looking for opportunities to purchase or develop industrial real estate that can be used for fulfillment.

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Today, the entire stock supply seems to have caught up with the demand. Amazon announced it will close or scrap development plans for dozens of fulfillment centers in the U.S., and the world’s largest industrial real estate developer, Prologis, has seen its shares fall by more than a third year-to-date. Some of this slowdown is certainly due to a slowdown in consumer spending due to uncertain economic and inflationary conditions, but there could also be some other key trends that could prevent e-commerce from growing indefinitely.

Prices have gone up for everything, but few categories have seen such a rise in transportation costs. Ever high gas prices and major supply chain disruptions in ports around the world have made shipping goods much more expensive. Since most direct-to-consumer sales depend on timely and inexpensive shipping, this could really slow e-commerce growth. Add to this the rising salaries and potential unionization of fulfillment center workers, and we could see Amazon and its kin struggling to keep their promise of free shipping. Better logistics can certainly help keep costs down, but no matter how you split it, higher transportation and fulfillment costs will make ecommerce less competitive.

It’s no secret that much of what is bought online comes from China. Over 40 percent of sellers on Amazon are Chinese, and many more ship directly from Chinese factories. Some estimate that nearly 90 percent of goods sold on Amazon come from China. These sellers benefit from a postal agreement that allows them to ship to American consumers at incredibly low costs. That deal was threatened by the Trump administration (although it still stands), but growing tensions between the two countries could put it to the test again. Any change in how we calculate shipping costs could help make physical stores more competitive.

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Our supply chain experts have done a great job finding ways to get goods to our doorstep, but there are still major hurdles when it comes to moving the other way. Online returns typically cost around three times the cost of shipping to the consumer. This is a big problem for e-commerce providers and that’s why so many retailers are considering charging for returns of online orders. Large fulfillment centers are not equipped to accept and sort returns, which gives brick-and-mortar stores a huge advantage.

The more time we spend online, the more likely we are to shop online. This has proven to be true, but might have an upper limit. Now that we are spending so much time at home and in front of screens, there is a desire to disconnect and experience the physical world. Traditional retailers could benefit from this, especially if they find ways to make the shopping experience more tangible. Some things are just more convenient to buy in stores, others are more fun. We must recognize that for many people, shopping is an important pastime that is not so easily replicated in front of our computers or smartphones.

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Don’t get me wrong, e-commerce isn’t slowing down anytime soon. Right now it accounts for about a quarter of retail activity in the US, while countries like South Korea account for as much as 37 percent, so there’s plenty of room for growth. But every trend has its limits and so does online shopping. An economic slowdown, rising transportation prices, and a shift in consumer trends could all contribute to a plateau in online shopping. This would affect much of our economy, but would be felt most severely by the commercial real estate sector, which has ballooned to support e-commerce. The growth in online shopping has been astronomical, but those numbers have to come back to earth (ba-dum-tss) at some point.

overheard

Pictured

CNBC has put together a useful map of all Amazon warehouses that have been delayed, canceled, or closed.

Our best

With the economy showing signs of weakness and commercial property prices remaining elevated, earn-outs could be a way to bridge the gap between buyers and sellers.

Other news

Bosses appear to be winning the battle to get employees back into the office. (forbes)

High-flying real estate agent Compass is trying to save money by cutting jobs. (Bloomberg)

Chinese companies, seeing the value of their US office investment decrees, have deteriorated in real estate investments in the country. (WSJ)





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