The explosion in e-commerce continues to disrupt the real estate industry, with no end in sight. E-commerce may affect demand for retail space, and it is already increasing demand for warehouse space. But where? What type of space will e-retailers need, and how long will they use it?
To seek answers to such questions, the industry needs to peek inside the secretive world of e-commerce fulfillment. This is exactly the type of insight provided during the 2015 ULI Spring Meeting in Houston in a session moderated by Steve Schellenberg of IMOS Worldwide Inc. and featuring Benjamin D. Conwell, president of Newport Advisors and former director of Amazon.com’s North America operations, real estate. During the most explosive growth period in Amazon’s history, Conwell led the development of more than 23 million square feet (2.1 million sq m) of build-to-suit projects and 5 million square feet (465,000 sq m) of leasing and repositioning existing product.
Schellenberg began the session by noting that 7 to 8 percent of U.S. retail sales have shifted from stores to e-commerce—a figure that is expect to grow to about 15 percent in the next three to four years, with huge growth in international shipping. Added Conwell: “Today in the U.S., we are at about $300 billion in e-commerce sales, up about five times from ten years ago. Projections are for this figure to more than double by 2019.” Conwell went on to point out that:
- 65 percent of U.S. shoppers do online research before buying in stores.
- There are more mobile devices than humans on the planet.
- Seventy percent of Walmart’s e-commerce sales come from mobile devices.
- About 10 percent of industrial leasing and 30 to 40 percent of total industrial development are now tied directly to e-commerce fulfillment activity.
- Nordstrom has experienced 3 percent sales growth in the last few years, with online sales five times higher than in-store sales.
- Both Target’s and Home Depot’s online sales are growing 40 to 50 percent each year.
The race is on for U.S. and global e-commerce leadership. Walmart, the world’s largest retailer, is launching a project designed to compete with Amazon Prime at about half of the yearly membership fee—$50 versus Amazon’s $99. But Walmart will face tough competition. “Jeff Bezos calls Amazon Prime the second-greatest thing they’ve ever done,” said Conwell. “Prime members spend orders of magnitude more than nonmembers. Membership has only grown since Amazon raised the price of Prime from $79 to $99; it’s addictive.”
But Prime is not the only strategy in which Amazon leads the e-commerce market. “Fulfillment by Amazon [FBA] is the company’s fastest-growing element,” said Conwell. “FBA leverages Amazon’s huge investment in software and logistics, allowing smaller retailers to sell on Amazon’s platform, paying Amazon to handle part or all of the fulfillment transaction.” According to Conwell, Bezos believes that the more products are on Amazon’s website, the more eyeballs and customers Amazon attracts. Amazon earns money on each FBA transaction, while using its highly efficient fulfillment network.
Amazon has built a vertically integrated product fulfillment and delivery system that bypasses the traditional delivery services such as FedEx and United Parcel Service. The company’s 79 massive fulfillment centers are strategically located to minimize delivery times. The biggest challenge—and where e-commerce wars are currently being fought—is the “last mile.”
For now, Amazon is tackling the last mile primarily by delivering products from its gargantuan fulfillment centers to depots, and then to customers’ homes via the U.S. Postal Service or Amazon-branded trucks. But these strategies are “changing as we speak,” said Conwell. For example, Amazon has a new urban delivery depot on 34th Street in New York City, across the street from the Empire State Building. From there, couriers hop onto bikes, buses, or subway trains to bring urban customers their eagerly awaited packages. In a pilot program in Munich, Germany, DHL drivers are given codes to open customers’ car trunks, delivering packages that customers then drive home. And, of course, the potential exists for package delivery by drones.
But the real estate industry may be too slow to react to the constantly morphing e-commerce industry. On the other side of the world, for example, Alibaba is seeking global e-commerce dominance with a completely different business model. Rather than investing in brick-and-mortar fulfillment facilities, Alibaba operates like a giant online flea market, in which every retailer pays a set fee to sell on Alibaba’s online platform. Alibaba does not fulfill orders; that the merchant’s responsibility. This Chinese competitor is happy to take care of payments, however, having processed three times more transactions in 2014 than PayPal.
So where does this leave the real estate industry? To potentially profit from emerging e-commerce trends, owners and developers should consider:
- Establishing relationships with third-party delivery services that work with individual retailers, upstart Amazon competitors like Jet.com, and Alibaba; and
- Seeking redevelopment opportunities for warehouse and fulfillment facilities in convenient spots such as major highway interchanges.