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Booming E-Commerce CRE

Booming E-Commerce CRE

There are numerous office vacancies and many retail stores closing during the current challenging period for commercial real estate.

Sales in physical stores have been declining steadily for years with some retailers facing increasing debt and the coronavirus pandemic forcing many to declare bankruptcy. As a result, retailers are decreasing the amount of their physical space; an article on Forbes.com estimates that more than 14,000 store units will close this year.

Transition to Online Retail

The somewhat uplifting news is that more business than ever is taking place online. In fact, according to a report from commercial real estate services firm JLL, 50% of this year’s leasing activity is related to the online retail industry. A CNBC article estimates that with e-commerce booming as many Americans shop from home, U.S. demand for real estate could reach an additional 1 billion square feet by 2025. Online sales are expected to surpass $1 trillion.

Manufacturing, warehousing, and distribution activity, fueled by the growth of online sales, has increased significantly. Amazon, the leader of the pack, has leased about 11 million square feet of distribution centers and warehouses in the Chicago area alone within the past four months. Amazon is also in talks with Simon Property Group Inc to turn some closing anchor department stores into Amazon distribution hubs. Frontrunners include J.C. Penney and Sears stores as both department store chains have filed for Chapter 11 bankruptcy protection.

CBRE, the largest commercial real estate service in the world expects a surge in rent for high-quality, Class-A warehouse space. According to their 2020 market outlook, “demand for light-industrial warehouses of less than 120,000 square feet will accelerate as e-commerce companies race to offer same-day delivery to customers.” Rents have risen by about 30% in the past five years, reaching an average all-time high of $6.68 per square foot in the second quarter of 2020. Vacancy rates for warehouse space were inversely proportional at a near-record low of 4.7%.

During the current health crisis, certain products are in greater demand, resulting in the need for more storage space. The uptick in online sales of household essentials—sometimes in bulk—as well as toys and recreational and entertainment items means companies need to stock more products than usual. Where they previously relied on a just-in-time (JIT) inventory management model to minimize the amount of stock and avoid paying for extra space, they realized that consumer demand warrants a just-in-case (JIC) model.

The Bureau of Economic Analysis (BEA) provides the most authoritative source of data about how consumers are spending their money. With people driving less, spending on gasoline and fuel oil dropped the most, down 25%. Food and beverage spending rose by an average of 10% with alcoholic beverages leading the category at 12% growth. Other product spending rose 6% overall, with growth in magazines and newspapers (19%), games, toys, and hobbies (11%), and household cleaning and paper products tied at 7%.

Subsector in Grocery Sales

Grocery is another component of e-commerce. Shelf-stable and frozen items have been staples during the pandemic with 86% of surveyed consumers reporting they had bought frozen food, according to the American Frozen Food Institute. CBRE recently explored the relationship between e-commerce grocery growth and cold storage warehouse capacity, suggesting that an additional 75 to 100 million square feet of industrial freezer/cooler space will be needed by 2025 to meet the demand generated by online grocery sales. Since e-commerce is typically fulfilled by local grocery stores, retail footprints will need to include fulfillment and storage space. As online orders rise, there will be a blending of retail and industrial space in addition to the regular temperature-controlled facilities accessible to consumers.

CBRE also predicts further consolidation among major public refrigerated warehouses (PRWs), leading to specialized development in major metro areas. Large cold storage operators could partner with developers to strategically build a network within these populated geographic markets. Networks are not the only anticipated building. With the average age of cold storage facilities at 34 years, more modern space will likely be needed, resulting in ground-up construction projects or major redevelopment initiatives.

Hiring Opportunities

The need for more space often equates to the need for more employees. There is currently a demand for fulfillment and delivery workers as well as warehouse facility managers.

According to Helbling Managing Director (Southeast) Wes Miller, owners are looking to expand current facilities or lease new space, developers are looking to meet demand, and contractors are trying to keep up. Due to the increased scale and speed to customer, owners are requiring more sophisticated facility and operations managers.

“We just completed a very complex search for a national franchisee owned contractor that was looking to reassume their back-end operations. Securing talent that understands procurement, supply chain, labor, and how to systematically expand an idea is not easy to find.”