Global e-commerce titans, such as Google, Amazon, and China’s Alibaba, are transforming customer expectations on product selection, convenience, and shopping experiences, which may lead to less demand for traditional retail real estate, Jim Tompkins, chief executive officer of Tompkins International, told attendees at ULI’s Midwinter Meeting in Paris last week.

Midwinter_bug“Hold onto your hats,” said Tompkins. “E-commerce is exploding. It is having a huge impact on retail, and the rate of that change is accelerating.

“Folks are losing their shirts because they thought they could keep going—but it isn’t reality,” he added.

More commentary from the ULI Midwinter Meeting

With global e-commerce sales growing 20 percent each year, the sector is reaching enough critical mass to force major transformations within the third-party logistics providers, retail, and logistics sectors, Tompkins said.

“E-commerce companies are on the offensive and creating strategic advantages. It’s a big deal. They are messing with things,” he added. “By 2018, traditional retail stores will occupy less real estate than [they do] today.”

Tompkins cited Alibaba as one of the aggressive forces that was cannibalizing in-store retail. The group has recently formed an agreement with China Post to share warehouses, processing centers, and 100,000 service points—creating an e-commerce platform for online retailers and shoppers that will extend their reach into lower-tier Chinese cities.

Alibaba—which undertook a record $25 billion initial public offering last year—has also begun testing drones to enable cheaper and quicker deliveries to its expanding customer base. Google, Amazon, and United Parcel Service also are trying out the service.

“These firms are innovating with how supply chains work, where they’re located, and how they service the customer,” he said.

The growth of e-commerce is driving activity in the logistics sector to include warehousing and final delivery. E-commerce users still represent only a tenth of all new leasing around the globe, but their share has doubled in the past few years as consumer behavior has quickly evolved. Such firms require three times the logistics space, or more, of brick-and-mortar retailers, according to Prologis.

This demand is supporting fervent investment volumes in the sector, which have reached record levels in Europe as firms such as Blackstone, CBRE GI, Prologis, and Segro seek to increase exposure. A record €23 billion (US$26.2 billion) was invested in logistics during 2014—a 23 percent increase on the same period a year earlier, according to Real Capital Analytics.

Logistics would be a competitive differentiator in retail, Tompkins said, as growing firms demand a diverse range of facilities to serve their needs—namely, properties suitable for delivering products direct to the customer, rather than those traditional warehouses that serviced stores.

“A center which combines distribution, fulfillment, returns, and liquidation is where the action is focused. That’s a different kind of building from the ones required in 2013 and there’s a tremendous amount of buying activity underway in this respect,” he said. “This is attracting the majority of investment activity,” he said.

Strong levels of occupier demand for units of more than 100,000 square feet (9,300 sq m) have seen the availability of existing units fall to record lows in England, Europe’s most active investment market—from a peak of 94 million square feet (8.7 million sq m) in 2009 to 22 million square feet (2 million sq m). This represents a fall of almost 47 percent year-on-year, according to Savills.

But e-commerce users are also locating logistics facilities closer to end consumers who are demanding faster delivery times. “Walmart has four times as much inventory in [its] back room than its fulfillment center. Their inventory is in-store. That is smart. Fulfillment locations are coming close to where people live.

“I expect a lot of grocery stores will be closed and turned into warehouse space. Buying dilapidated space is a good opportunity. I would take unused shops and turn them into pickup points for online shoppers,” Tompkins said.

But Tompkins said that while speed was becoming a competitive differentiator, investors should understand that service-level demands would be different depending on population density.

“Expectations vary. The customer in New York City wants the product now. But in Montana, the customer might be prepared to wait for four days. You also need to consider who is buying the product and what they are buying it for,” Tompkins said. “You need to look at how the network works.

“If your customer gets a $2,000 discount on a $10,000 designer purse, she might be prepared to wait for two weeks for it. You have to think through who is buying products and why,” he added.