CHICAGO, IL — As larger U.S. retailers continue to close underperforming stores with more customers choosing to shop online from their own homes, big-box store vacancies have increased in recent years. But with online sales only increasing and more small shop spaces mimicking the online sales environment, the biggest impacts are being reflected in warehouse space and logistics.
The surge in e-commerce has been a boon for the recovery of the retail sector. Its rise is also contributing to the performance in industrial and warehouse properties during the last two years. According to the U.S. Census Bureau, e-commerce sales in the first quarter of 2016 accounted for 7.7 percent of total retail sales, compared to 4.2 percent in 2010, and 2.3 percent in 2005.
"People of all ages, not just millennials, want everything, and they want it within one or two days," says Davide Pio, CCIM, broker and associate at BCRE in San Francisco. "Amazon recently took a big chunk of warehouse space in Tracy, CA, which is about one hour away from San Francisco. You can hit a fairly large metropolitan area for delivery with that type of proximity."
As sales continue to increase, companies like Amazon and other large e-retailers require more warehouses of varying sizes in more locations. In addition to the increased logistics involved in processing goods for online distribution, the final boxed goods prior to shipment require more than double the space than for a brick-and-mortar store. Analysts believe such logistical challenges for online sales will continue to spur increased demand for industrial space. Vacancies for the sector sit at 10.6 percent, down from the recent peak of 14.2 percent according to Reis Analytics.
Omni channel, online sales and brick and mortar are adding to the shopping experience. "People still want to touch and see the products they want," says Howard Meier, CCIM, a vice president and commercial broker at Hummingbird Real Estate Brokerage in Toronto. "Retailers have to create newer experiences."
One example is B8ta in Palo Alto, CA, a brick-and-mortar retailer that opened last year. The store mimics the sales environment customers experience online by leasing space within a single retail store to multiple product makers. These product manufacturers can change wares instantly, have flash sales and even offer customized options for the selected product being delivered to the customer in a few days.
Some traditional e-commerce sites are even opening up brick-and-mortar bookstores to complement online sales allowing them to interact directly with customers and strengthen brand loyalty. Amazon opened its first physical store last year in Seattle with a second store planned for San Diego in a few months.
"Online and retail are supplementing each other," says Tanner Laverty, CCIM, managing broker for Laverty Chacon Commercial Real Estate in San Francisco. "These are totally new concepts that will add to the absorption of traditional retail spaces. You will have segmentations within the market, where one retail aspect of Amazon might just sell computers. And with newer FAA regulatory legislation for drone use for deliveries being introduced, you will start to see even more changes."
As online shopping continues to grow alongside newer brick-and-mortar retail models, the delivery of products, whether by trucks or drones, will still need industrial space to house and process inventory that is close to both urban and rural markets. Since these products need to be packaged, boxed, and stored, they will require even more space.