As more consumers continue to opt to buy goods online, as opposed to venturing out to retail store locations and shopping malls, amid the ongoing COVID-19 pandemic, it is resulting in a subsequent impact on industrial real estate, specifically the part of the market focused on warehousing and logistics.
That was a major takeaway in a recent report published by San Francisco-based real estate investment trust company Prologis.
In the report, entitled “COVID-19 Special Report #6: Accelerated Retail Evolution Could Bolster Demand for Well-Located Logistics Space,” the report lays out multiple findings that speak to the ongoing intersection of e-commerce and logistics, against the backdrop of industrial real estate activity, including:COVID-19 has essentially accelerated the retail evolution, as U.S. e-commerce penetration moved up to more than 25% in April, ahead of the 15% rate at the end of 2019, with the firm estimating e-commerce penetration for all of 2020, at nearly 20% compared to a pre-pandemic forecast at 16.9%; e-commerce requires more than three times the logistics space of brick and mortar stores, which it called a “persistently high ratio” that supports the need for additional e-fulfillment space should e-commerce penetration maintain its current pace, as more people stay at home; and retailers that have recently announced bankruptcies account for a small fraction of logistics demand, with their distribution centers located farther from population centers, among others
Prologis Vice President of Research Melinda McLaughlin said in an interview that there are a few factors as to why e-commerce requires more than three times the logistics space of brick and mortar stores.
“First, e-commerce is a space-intensive sales channel,” she explained. “Retailers generally offer a much wider product variety online, compared to in-store, and need to accommodate greater volatility in purchase activity, both of which drive the need to hold more inventory. E-fulfillment also incorporates individual product picking and space-intensive parcel shipping operations. Finally, many of these spaces need to accommodate returns and the accompanying reverse logistics, and often value-add operations such as assembly. In some cases, the need to accelerate the movement of goods can require a new warehouse that is larger in size and height.”
What’s more, the report also observed that while e-commerce requires more than three times the logistics space of brick and mortar stores, industry stakeholders had expected this ratio to decline while e-commerce operations became more productive. But the report pointed out that the ratio’s stability indicated that supply chains were not yet optimized for the future balance between online and in store channels in advance of the COVID-19 pandemic.
“Even before the pandemic, we were in a period of historically low availability for logistics real estate,” said McLaughlin. “The need to accommodate rapid growth in e-fulfillment within a legacy distribution network tailored for store distribution drove pent-up demand for properties that were well-suited for the future balance of sales activity, specifically in properties close to end consumers.”
And when the yet-to-be determined post-pandemic era is here, the report said that the push for resilient supply chains is expected to lift the intensity of use for e-commerce and brick and mortar customers alike, as “persistently higher” e-commerce space needs support the firm’s expectations for demand tailwinds.
As for whether the race is officially on for warehouse space from retailer and e-commerce shippers, McLaughlin said it certainly has accelerated.
“Prior to the pandemic, demand for well-located distribution centers was high,” she said. “Both customers and investors recognized the key role that logistics facilities play in revenue generation, particularly in fast-growing segments like e-commerce. That role was highlighted during the pandemic, most clearly illustrated by the acceleration of a years-long shift toward online commerce. Customers which had been planning to gradually reconfigure supply chains over that period instead needed to re-assess distribution networks in the near-term to accommodate post-COVID consumer demands. While modalities are changing and service levels are increasing, the foundation of demand for most logistics real estate users has not changed: many items that flow through supply chains are tied to basic daily needs such as food and beverage, consumer products and medical supplies.”
And when asked where the concept of share, or rented, warehouse space fits into things, McLaughlin noted that that the pandemic caused both trade disruption and a rapid shift in consumer behavior.
“As a result, shippers are coping with volatile swings and seeking more flexible warehousing options,” she said. “We saw this ourselves, when e-fulfillment operations and third-party logistics companies accounted for nearly 40% of Prologis’ new leasing in March and April. Short-term leases also increased in the months after the coronavirus outbreak. In volatile periods, we would expect that having the option to lease a turn-key logistics facilities becomes more attractive. As of today, however, that does not replace the need for distribution network planning that accounts for the new balance between sales channels.”