Q: How does the rise in e-commerce impact the industrial real estate market?
— RIA, Louisville, KY
A: The boom in e-commerce continues to fuel demand for industrial real estate.
There is no question that e-commerce now represents a real part of the retail economy. Today, online sales account for roughly 16% of all retail sales, having grown three times as fast as brick-and-mortal over the past decade. This trend is expected to persist, with-commerce market share (as a percentage of overall retail sales) forecasted to reach 35% in the next decade.
E-Commerce Sales as a Percentage of Total Retail Sales
But what does that mean for owners of industrial real estate?
As consumers continue to increase their online purchasing, companies need more warehouse and distribution spaces to manufacture, store and directly deliver these goods.
But did you know that companies need three times the warehouse space to handle online transactions compared to traditional retail? Furthermore, the widespread adoption of same-day delivery has amplified the need for extensive, cross-continental distribution networks. For every $1 billion in online retail sales, an estimated 1.25 million square feet of distribution warehouse space is required3 (the equivalent of over 20 football fields). Additionally, to satisfy the onset of ‘easy returns,’ it is estimated that reverse logistics (the flow of goods from consumers back to sellers) requires up to 20% more space and labor capacity compared to forward logistics3.
The accelerating demand for warehouse space has outpaced the market’s ability to supply it. The construction of new industrial properties has not kept up to pace due to factors such as rising construction costs and financing challenges. The supply and demand imbalance has resulted in low vacancies and landlords of high-quality assets in prime locations can therefore command higher rents. This ultimately results in higher valuations and stronger cash flow growth for investors.
For more in depth perspectives on the evolving U.S. industrial real estate landscape, I encourage you to read our recent Private Market Insights article featuring Dave Fazekas, CIO of Ares Industrial Management. Read more here.
