The COVID-19 pandemic boosted e-commerce across practically all categories. When brick-and-mortar stores shut down, people turned to online ordering for both necessities and entertainment. Sales skyrocketed for groceries, clothing, home furnishings, pet toys, and much more.
Although lockdowns played a significant role in online shopping’s recent popularity surge, most retail experts say that popularity will be sustained even as lockdowns are lifted and retail stores reopen. With this increased shift towards e-commerce, the commercial real estate industry finds itself in a period of change, as the demand for warehouse space outpaces the need for traditional retail locations.
The Changing Landscape of Commercial Real Estate
Prior to the pandemic, commercial real estate services firm JLL estimated 35 percent of their leasing activity related to online shopping. Today, e-commerce warehousing accounts for 50 percent of their leasing. The first quarter of 2020 was the firm’s largest in three years, and they estimate even greater gains going forward.
Companies interested in leasing space to fulfill online orders typically move much faster than traditional retailers. For example, after leasing a 1.2 million-square-foot warehouse from JLL, an e-commerce retailer in Delaware moved in and started fulfilling orders within 30 days. With a traditional retailer, the process between signing the lease and moving in is about nine months.
Anticipating Future Storage Space Needs for Online Retailers
The US will need an additional one billion square feet of warehouse space by 2050. Roughly 100 million square feet are needed for cold storage.
Prologis, a real estate investment trust, and Amazon’s largest landlord, estimates that e-commerce companies require 1.2 million square feet of space for every $1 billion in sales. To put these numbers into perspective, marketing firm eMarketer is predicting that US e-commerce sales will exceed $710 billion in 2024, representing 18.1 percent of all retail sales. Additionally, they estimate total online sales will surpass $1 trillion for the first time.
How E-Commerce Leasing Compares to Traditional Sectors
The high demand for online fulfillment centers has made industrial real estate the hottest sector of the market. Meanwhile, office, hotel, and retail spaces across the country struggle to find renters.
Traditional brick and mortar retail stores were hit especially hard by recent lockdowns and have struggled to return. The number of store closings is on pace to hit a record high. Landlords are scrambling to fill spaces, and retailers looking to survive and are often attempting to renegotiate their lease specifics.
One potential solution involves shopping malls. Jan Kniffen, a former department store executive, predicts one-third of all malls will close by 2021. Not only will each closure affect the businesses and employees inside the mall, but the resulting loss of tax revenue can affect the surrounding town.
However, some cities have found success by converting unused retail locations into e-commerce warehousing. For example, in Memphis, Sam’s Club turned a closed retail store into an online fulfillment center.
“Before converting unused retail space into an online fulfillment center, it’s important to look at all relevant zoning laws,” says Hisham Khaki, owner of HapiGig. “Repurposing a building can become a fairly involved process, but it also presents a potential win for business owners, companies, and landlords.”
What Does the Future Hold?
Online shopping was already creating significant upheaval in traditional retail and real estate sectors, with the pandemic and subsequent lockdowns accelerating those changes beyond what anyone could have predicted. As e-commerce continues to grow in popularity, many traditional retail locations will likely transition into fulfillment centers, and retailers may place less emphasis on in-person sales.
Although the transaction between customer and store is virtual, online shopping will continue to make a significant impact on real estate markets and need for warehouse space across the country.