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Evolution of e-Commerce in Industrial Real Estate

By: Mehtab Randhawa

Over the last decade, the continued growth of the U.S. economy, alongside the fortification of the global supply chains has greatly accelerated demand for industrial real estate. Fundamental shifts in consumption patterns, specifically the remarkable growth of e-commerce and the adoption of online shopping, have transformed the way businesses establish their supply chain as well as logistics networks. These transformations have enabled the industrial market to establish historical peaks for occupancy, rental rates, and demand throughout the nation.

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e-Commerce in Industrial Real Estate

The evolution of online shopping created exceptional tailwinds for the e-commerce industry and overall industrial silos. E-commerce is a business model that involves the buying and selling of tangible products and services over an electronic network, typically the internet. The industry, which barely existed a decade ago, began to surge in 2013, rapidly increasing the demand for logistics real estate due to distribution, fulfillment, and delivery of items directly to consumers.

Industrial demand during this time period also created structural uplifts for other sectors, such as retail. For niche businesses or smaller establishments, the e-commerce operating model allowed them to gain a greater market presence and supplement the brickand-mortar model with an online store. The spillover effect of businesses increasing their e-commerce exposure to capture the direct-to-consumer market also increased the durability of logistics demand.

Big box retailers such as Target, Walmart, and Costco augmented competition in the digital space by expanding their online stores, particularly in response to the pandemic, which allowed customers to purchase goods right from their home and ensued impressive results for the companies.

Impacts from the Pandemic, Drivers of Growth, and Beneficiaries of e-Commerce Demand

Advancements in technology and demographic shifts reshaped consumer shopping habits and pushed delivery expectations to new levels. The global pandemic further escalated the transformation of the online shopping experience, forcing traditional retailers to incorporate rapid replenishment operations to compete. During this time, many retailers who had not previously had an active e-commerce presence amplified online operations to stay on trend. In turn, this evolution accelerated leasing from the e-commerce industry and pushed fundamentals in the industrial property sector to remarkable levels. The e-commerce industry continues to exert an outsized effect on the warehouse and distribution leasing market. Associated shelterin-place policies stemming from the pandemic further increased the need for big-box warehouse leasing across the nation. Big-box leasing transactions continues to be persistent, either through pure-play sellers or traditional retailers who are continuing to build out their footprints with new nodes across the country. Competition among e-commerce companies for industrial space remains fierce and while shelter-in-place requirements have receded, the convenience and efficiency of online shopping are likely to remain an embedded part of routine shopping for a much wider swath of the population than was the case pre-pandemic.

E-commerce was remarkably resilient throughout the pandemic and accounted for 15.7% of total industrial

demand in 2020, which was a record high. Much of the demand exhibited during the pandemic was largely driven by companies trying to keep pace with consumer demand and expectations. Now we are starting to see leasing level off and stabilize. While 2020 was an anomaly year, in terms of e-commerce leasing, demand remains elevated compared to historic levels.

The surge in the adoption of online shopping and insightful consumer expectations, in terms of speed and delivery of goods, has added more pressure to the supply chain. As a result, demand has spread beyond the big e-commerce players that dominated the market in 2020 to industries servicing the supply chain. 3PL and Logistics & Distribution companies such as XPO Logistics, DHL Supply Chain North America, and Ryder Supply Chain Solutions showed especially powerful momentum in response to amplified demand and supply chain disruptions.

Pressed to move a record volume of goods while maintaining competitive delivery times drove 3PL as well as Logistics and Distribution users to lease aggressively to increase their networks’ capacity and efficiency. Together, these industries accounted for nearly a quarter of total

leasing volume in 2021. As more companies continue to outsource their operations to meet consumer online demand, we expect these industries to flourish, especially within the 3PL sector.

Supply and Demand in the Changing Tenant Management Relationship

As the demand for e-commerce rises and the supply chain develops, industrial spaces have new needs and new types of tenants.

Join Emily White, Vice President - Industrial Property Management with JLL, as she discusses the strides being made in tenant relations in the industrial space. Tenants have new requirements and property managers need to be creative to capitalize on the rapid growth of e-commerce and the new tenants this growth brings.

E-Commerce Growth and Demand in Urban Logistics Markets

In 2022, the rise of online shopping continues to challenge logistics companies to transport goods to more addresses at faster speeds and lower costs, with hopes of shortening the last leg of their distribution network, also known as the last mile, from a facility to the customers’ doorstep. To combat these challenges, companies are

shortening the last mile by opening distribution facilities in, or within, a short drive of the urban areas where their customers are concentrated.

The concern with moving away from suburban big-box warehouses to smaller distribution centers that are closer to the urban populations is that they generally have less functional distribution space and there are limited undeveloped sites primed for new logistics development. According to the Industrial Tenant Demand Study Report by JLL Research, to keep pace with online shopping demand, more than half of all e-commerce requirements will occur in Urban Logistics markets.

More established Urban Logistics markets such as San Francisco, Los Angeles, Chicago, Boston, New York, and Philadelphia are already seeing an immediate existing need for last-mile facilities and pushing

innovative ideas to meet dwellers’ delivery needs. The increased need for e-commerce related space within and around dense metropolitan areas is expected to continue and be driven by the ongoing adoption of online shopping within urban cores and exceedingly quicker delivery speeds promised by retailers involved in e-commerce operations.

E-Commerce and Industrial Space Continues to Grow

Forecasting reports from eMarketer project e-commerce expanding by 24 percent of retail sales by 2025. With sales expected to rise, JLL experts anticipate the U.S. will need 1 billion s.f. of new industrial space this decade to keep up with the increasing demand. Though industrial demand has been robust across the board, Urban Logistics markets like New York, Bay Area and Los Angeles have posted a more pronounced spike in e-commerce demand as compared to the rest of the nation.

Many of the established Urban Logistics industrial markets are seeing vacancies well below the national average, and expedited delivery expectations imposed by consumers will continue to boost demand in the future. JLL expects that logistics real estate leasing activity will increase in large “big-box” sites on city peripheries as well as urban, infill sites for ‘last-mile’ operations. With many sources projecting e-commerce to make up 40 percent of all retail sales in the next 10 years, we expect demand for all related industries and markets to continue to gain more share.

About the Author Mehtab Randhawa

Mehtab Randhawa is Director of Industrial Research for JLL’s Americas Region. In her role, her responsibility is to direct and implement strategy, methodology, product / platform enhancement and the firm’s overall analysis, message and outlook for the macro U.S. industrial sector. Mehtab also ensures that JLL’s research platform evolves to meet the evolving needs of JLL’s clients and prospects and proactively creates thoughtful research on a variety of topics including supply chain, manufacturing, warehouse & distribution and e-commerce that are relevant to today’s corporate real estate decision makers.

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