With e-commerce activity hitting a fever pitch, the real estate market is scrambling to keep up with a new type of building demand that combines distribution centers with fulfillment centers. Jim Tompkins, CEO of Tompkins International, a supply chain consulting and implementation firm based in Raleigh, North Carolina, said the e-commerce industry experienced ten times the rate of change in 2014 as it did in 2004. Noting Wal-Mart’s announcement last week of unlimited two-day delivery for $50 per year, Tompkins said the rate of change has accelerated in 2015.
“This thing is exploding around us,” said Tompkins, who spoke at a session titled “How Today’s e-Commerce Trends Impact Commercial Real Estate” during the ULI Spring Meeting in Houston.
Because the lines between product manufacturers, retailers (who have essentially become manufacturers through private-label goods), and distributors are blurring, Tompkins said, the real estate industry has to adapt to create a new product type that meets the needs of all of these users in one.
“The old definitions aren’t true anymore—everyone is everything,” Tompkins said. “We’ve got to change the way we think about that in terms of real estate.”
He pointed out that the evolution of a combined distribution center and fulfillment center has created a huge impact on the real estate market in a way that is still emerging and changing by the minute.
When e-commerce first began to take off in the mid-1990s, most supporting real estate came in the form of distribution centers. By 2000, the model had morphed into a distribution center with a fulfillment center in the corner, later evolving into a distribution center with a few designated employees to handle online fulfillment. By 2009, real estate had adapted and emerged in the form of separate distribution centers and fulfillment centers, a model that by 2013 had again shifted to larger, combined distribution and fulfillment centers with a defined supply flow and process.
Tompkins said this evolution has resulted in the need for new types of buildings that meet the needs of manufacturers, retailers that have essentially become manufacturers, and traditional distributors. This is all being done, he said, to meet an exploding demand for e-commerce, in which consumers abandon the traditional shopping experience and instead expect products to be delivered to their door in two days or less, and, in some cases, within just hours. It has also led to the closure of 6,000 retail stores across the country this year, and has dealt another blow to already ailing traditional shopping malls.
“It’s a growing and transforming customer experience that is innovating and disrupting, and putting retailers that are becoming e-commerce players on the offense,” Tompkins said. “The closure of retail stores is also leading to the transfer of space that begets interesting real estate plays in addition to e-commerce requirements for more fulfillment space.”
Tompkins said these trends also have led to a shift in the location of fulfillment centers, which are being moved closer to high-population cities, the opposite of the real estate trend 20 years ago. Because customers are demanding retail product deliveries within days or even hours, the combined distribution and fulfillment center needs to be closer to population centers so promises of fast delivery can be met.
Tompkins suggested that certain types of abandoned real estate properties, such as shuttered grocery stores and former shopping malls, could be repurposed into combined distribution and fulfillment centers.
All of these factors are falling into place to create a restructuring of the supply chain in a way that meets the increasingly rapid timed delivery that consumers demand. And, Tompkins said, the impact on real estate is only now starting to be felt in a way that requires major changes in the way the industry plans for the future.
“Retail, consumer products, and distribution are all getting mixed up into one, and the impact on real estate is going to be massive,” he said. “It’s a whole different game now than it was even in 2014. We need to look at that and start making decisions.”
