E-commerce continues to sculpt the retail landscape in more ways than one. The retail sector is estimated to generate revenues of $28 trillion by 2019, globally, with an annual growth rate of 3.8%. In the same time period, it is…
E-commerce continues to sculpt the retail landscape in more ways than one. The retail sector is estimated to generate revenues of $28 trillion by 2019, globally, with an annual growth rate of 3.8%. In the same time period, it is estimated that e-commerce will develop at a CAGR of 23%, with e-commerce sales on track to reach over $4 trillion by 2020. By then, e-commerce is expected to comprise about 14.6% of the overall spending in retail.
According to Marcus & Millichap’s 2017 Mid-Year Industrial Overview, this explosion in online retail has resulted in structural shifts in the industrial sector, especially in terms of retail space requirements, and supply chain. Rents have hit a record high as demand for storage drives up the value of industrial real estate.
The irony isn’t lost on commercial real estate buyers – brick-and-mortar is emptying out, while industrial vacancy is the lowest it’s been in seventeen years, despite construction and development in the sub-sector continuing its upward trajectory, over this time. Research and advisory firm, TechNavio, expects the warehousing and storage market in the United States to grow at a CAGR of 6.93 percent from 2015 to 2019.
Research from Prologis, one of the largest industrial REITs, has revealed that e-commerce comprises approximately 20% of all new leasing in logistics real estate today, while just five years ago, it represented less than 5% of the market. The study also highlighted that online retail requires thrice the amount of distribution centre space, compared to traditional brick-and-mortar retailers. Amazon alone conducts logistical operations across the world through its 400 fulfilment centres, warehouses and hubs, which together span over 144 million square feet in area. As its top tenant, Amazon accounts for 3.1% of Prologis’s rent, followed closely by global delivery service, DHL.
Industrial real estate has seen a reversal of certain trends. For instance, the traditional thought process that sought to buy in remote, tax-advantaged areas is now changing in favour of investments in warehouses or distribution centres that are located near populous zones. Location is of utmost importance to e-retailers who are chasing faster delivery times, and minimized transportation costs. Smaller warehouses and distribution centres are preferred for same-day delivery operations and are also easier to source in populated areas.
A dearth in available quality leasing spaces in the United States has also driven up new construction, with over 194 million square feet of construction in the pipeline for this year, according to JLL. Even with this additional supply, it is expected that vacancy will continue to decrease, and demand for warehouse and distribution space will continue to remain robust over the coming year.
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