The Effects of E-Commerce on the Retail and Industrial Markets

axxis real estate llc


Jun 15, 2019

E-commerce has exploded since its inception in 1991.  Currently, online sales constitute over 14% of all retail sales in the United States market, a number that Deloitte predicts may more than double by the year 2030.  Perhaps even more important is the fact that e-commerce sales make up almost 52% of all retail sales growth, continuing to advance annually at a rate three times as much as traditional brick and mortar retail businesses.  So what, exactly, does this mean for the retail and industrial real estate markets?

Effects on the Retail Market

As e-commerce giants like Amazon and E-Bay have overtaken the market, more and more big-box brick and mortar retailers are closing their doors, unable to keep up with the competitive pricing of their online adversaries.  This does not, however, mean the imminent demise of traditional retailers (remember that around 86% of retail sales are still generated through brick and mortar storefronts), only that retailers who are choosing to stick with the more conventional model have to evolve with the changing needs of the consumer.  The new consumer is seeking out an experience that they can’t otherwise get.  In other words, if they’re going to leave the comfort of their own homes, it had better be worth it.  This means that the antiquated models for businesses like movie theaters, health clubs, and bowling alleys, among others, are being replaced with new models that offer a wider variety of options for the consumer to enjoy.  This could mean the incorporation of better quality food options or premium cocktails that will entice a new demographic.

The influx of e-commerce businesses has also shifted the focus in the commercial retail market to include much greater awareness of the restaurant niche.  Previously a largely overlooked contender in retail, restaurants are gaining attention from investors as the trend of consumers seeking experiences continues to grow.

Additionally, the changes to the retail market have made valuing retail properties exponentially harder, as areas once considered high-traffic or high-street retail may not hold the same weight.  As many of the big-name anchor stores close their doors, the associated shopping centers are losing appeal for smaller businesses which might have relied on their volume in years prior.  Many businesses are choosing to downsize as well, opting to replace an abundance of inventory displays with interactive opportunities that require far less space.  This makes it more difficult to value a property based on its square footage.  Retail space, however, is not the only commercial real estate sector that is feeling the changes put into motion by the rise of e-commerce.

Effects on the Industrial Market

The industrial market is also feeling the full effects of the e-commerce boom.  As more retailers move their businesses online, the need for accessible warehouse space to assemble and store products continues to rise.  Even with the 2,000 plus establishments that have been added to the U.S. Market over the past decade (classified as storage or warehouse space), the supply is falling short of the growing demand.  One of the biggest factors affecting this gap is location.  With consumers becoming more reliant on same or next-day delivery, it has become increasingly important to have access to warehouse locations within densely populated markets, such as New York City, Los Angeles, and San Francisco. 

Building in the area of New York City, however, comes with its own set of potential problems.  The high cost of building new modern warehouses and the lack of available land make initiating these projects extremely difficult.  Some markets are looking to solve these problems by embracing the concept of the multi-story warehouse, common in countries like China and Japan where smaller trucks are used to transport products (making them easier to navigate the narrow ramps from one story to another).  While the West Coast was the first to implement these structures in the American market, the East Coast is not far behind.  New York currently has three developments planned in the areas of Queens, the Bronx and Brooklyn.  These buildings, too, come with their own bit of controversy.  For one thing, due to the lack of vacant land, many developers are looking to purchase existing functionally obsolete warehouses, only to tear them down to create enough space to erect these multi-story buildings, further increasing costs and effectively doubling the rent (without the guarantee of being able to fill the space with tenants who are able to justify the additional expense).  Add to that the dilemma surrounding whether or not to design these structures to accommodate the 53-foot trailers common in the States and you can see why it’s become a topic of interest.  Additionally, warehouses and distribution centers are becoming increasingly reliant on robotic technology to help them keep up with demand and the quick delivery of products.  Industrial spaces are, therefore, more dependent on modern infrastructure that can support such automation.

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