Industrial Real Estate is Exposed to E-commerce Headwinds

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Plenty has been written about the skyrocketing growth of e-commerce over the last couple of decades, compounded in recent years by pandemic lockdowns of “non-essential” retailers. So it’s hard to believe that online shopping wasn’t always a sure bet. Back in the nineties there were skeptics about the validity of the trend, even Amazon was written off as just a place to buy books. But once the infrastructure was built that allowed goods to be purchased online and shipped directly to consumers, more of our waking hours were spent browsing web stores. Online shopping smashed most people’s growth predictions. This new purchasing channel did so well that some started to think that it would replace in-store shopping altogether.

If online shopping wasn’t already a global juggernaut, the aforementioned COVID-19 pandemic pushed it over the edge. For more than a year, most people had no choice but to order almost all of their consumer goods online or visit the oh-so-essential big box stores amid hordes of socially-distanced shoppers. Not only was there a mad rush for toilet paper in aisle six, retailers everywhere stepped up their online ordering capabilities and this in turn overwhelmed warehouse capacity. Since then, almost every commercial real estate firm has been looking for ways to buy or develop industrial properties that can be used for fulfillment.

Today, all of the warehousing supply seems to have caught up with demand. Amazon announced that it would be closing or scrapping development plans for dozens of fulfillment centers in the US and the world’s largest industrial real estate developer, Prologis, has seen its stock fall by over one third since the beginning of the year. Part of this slowdown is certainly due to a cooling off in consumer spending due to uncertain economic and inflationary conditions, but there could also be a few other important trends that might prevent e-commerce from growing indefinitely.

Prices have been rising for everything but few categories have seen a spike in costs like that of transportation. All time high gas prices and major supply chain disruptions happening at ports around the world have made shipping goods much more expensive. Since most direct-to-consumer sales rely on timely and cost effective shipping, this could really put a damper on e-commerce growth. Add to this the growing salaries and possible unionization of fulfillment center employees and we might start to see Amazon and its kin struggle to maintain their free shipping pledge. Better logistics can certainly help keep costs low but no matter how you slice it, higher transportation and fulfillment costs will make e-commerce less competitive.

It’s no secret that much of what is bought online comes from China. Over 40 percent of the sellers on Amazon are Chinese and many more just ship directly from Chinese factories. Some estimate that almost 90 percent of the goods sold on Amazon are from China. These sellers benefit from a postal agreement that lets them ship to American consumers for incredibly low costs. This agreement was threatened by the Trump Administration (although it remains) but the growing tensions between the two countries could put it on the chopping block again. Any change in the way we charge for shipping could help make physical stores more competitive.

Our supply chain experts have done an amazing job of finding ways to get goods to our doorsteps, but there are still major hurdles when it comes to moving in the other direction. Online returns generally cost about three times as much to ship back than the cost to get to the consumer in the first place. This is a major problem for e-commerce providers and is why so many retailers are considering charging for returns of online orders. Large logistic centers are not equipped to receive and sort returns, giving brick and mortar stores a major advantage.

The more time we spend online, the more likely we are to shop online. This has proven to be true but might have a ceiling. Now that we are spending so much time at home and in front of screens, it creates a desire to disconnect and experience the physical world. That could benefit traditional retail establishments, especially as they find ways to make the shopping experience more experiential. Some things are just more convenient to buy in stores, others are more fun. We have to recognize that shopping is a major pastime for many people, one that can’t be replicated as easily in front of our computers or smartphones.

Don’t get me wrong, e-commerce isn’t going to slow down anytime soon. Right now it represents around a quarter of retail activity in the US while places like South Korea are as high as 37 percent, so there is plenty of room for growth. But every trend has its ceiling and online shopping does too. An economic slowdown, rising transportation prices, and a shift in consumer trends could all contribute to a plateau in online shopping. This would have impacts on much of our economy but would be most felt by the industrial real estate sector that has ballooned to support e-commerce. The growth in online shopping has been astronomical, but these kinds of numbers eventually have to come back down to earth (ba-dum-tss).

Overheard

Mapped

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

Our best

As the economy is showing signs of weakness and commercial real estate prices remain high, earn-outs might be a way to bridge the gap between buyers and sellers.

Other news

Bosses seem to be winning the battle to get employees back to the office. ((Forbes)

High flying real estate brokerage Compass looks to save cash by cutting jobs. (Bloomberg)

Chinese firms that have seen the values ​​of their US office investments decrees have soured on property investments in the country. (WSJ)

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