How Much Should Industrial Buy Into These 3 E-Commerce Trends?

Industrial real estate has looked unbeatable over the last few months, and the coronavirus pandemic has prompted a slew of predictions about the future of e-commerce: that consumers won’t go back to brick-and-mortar, or that retailers will start using warehouses to stockpile supplies for another crisis, boosting industrial demand higher than we’ve ever seen. 

How much truth is there in these predictions, and how much is just wishful thinking for the industrial market? Bisnow sat down with JLL Executive Vice President Matthew R. Powers, who studies the big picture of American e-commerce distribution, to gauge his expectations for the e-commerce market.

Will consumers make the switch to e-commerce forever? 

The pandemic has pushed more Americans than ever to try out online shopping. But will those consumers go right back into stores when they get the chance, or does the pandemic mean a long-term shift toward e-commerce — and a surge in demand for warehouse space?

Powers expects that while some consumers may never get used to doing their shopping online for daily needs like groceries, the majority are going to permanently expand e-commerce's role in their daily lives. The slow but unstoppable shift to e-commerce that retailers and distributors foresaw years ago has only accelerated, and warehouse leasing is not likely to stagnate after the pandemic.

“When you’re talking about essential businesses, you’ve almost seen a doubling in their industrial demand,” Powers said. “That is expediting how quickly they want to get into markets around the country. Instead of a 10- to 15-year industrial growth plan, it’s now a five-year growth plan.”

While Powers expects large leasing demand from retail giants — like Walmart, Home Depot and Lowe’s — that are looking to expand their distribution networks, he expects a similar spike in demand from smaller retailers that will be entering the online shopping market for the first time.

“Companies that have been resting on their laurels for years are now starting to dip their toes in the water,” Powers said. “They recognize that they have to get a new shopping lane in these times.”

However, finding the capital in the middle of a pandemic to start building a distribution network may not be in the cards for many regional grocers and clothing stores. Powers expects there may be consolidation and acquisitions as a result.

Will the pandemic reward industrial hubs and punish the little cities?

With investors becoming choosier about where they place their capital, some industrial experts expect a bifurcation in the market, with newly built warehouses in port cities and rail yards reaping all the benefits, while older warehouse stock in smaller cities gets overlooked.

But in Powers’ opinion, the nature of e-commerce deliveries spells good things for small metropolitan areas around the country. Because consumers are coming to expect next-day deliveries, retailers are increasingly looking to build networks of small fulfillment facilities, close to population centers.

In his home market of Arkansas, Powers said, companies might have invested in a large, single, rural distribution facility to cover deliveries to both Little Rock, in the center of the state, and the northwest corner of the state, three hours’ drive away. But as consumers start ordering more, those long drives won’t be financially viable.

“A distribution network does not translate into an e-commerce network,” Powers said. “That’s going to create a need for a warehouse in all of these metropolitan areas of a few hundred thousand people, like Little Rock or Greensboro, North Carolina.”

Since 2017, Powers said, he had not seen much inbound industrial demand for Little Rock, but in the last six months, he has been asked to find inventory for four different 100K SF leases to support retailers and medical suppliers.

In many cases, Powers expects, smaller towns may not have a deep pool of newly built industrial assets to lease out, creating an opportunity for new development.

“A few 100K SF leases may be a drop in the bucket in a big port,” Powers said. “But in these smaller cities that don’t get a lot of attention, that’s a big impact.”

Will retailers start keeping stockpiles of consumer goods?

When the pandemic set in, retailers found themselves with empty shelves. According to Powers, that shortage frightened many retailers that had worked hard to build robust supply chains.

“Even here in Bentonville, you couldn’t find an aisle with toilet paper,” Powers said. “Companies don’t want to find themselves in that place again.”

Supply chain experts have suggested that to keep Americans supplied during a future crisis, retailers could start keeping larger stockpiles of consumer goods, just as medical experts have called for the government to keep larger stockpiles of protective equipment like masks and surgical gowns. 

Powers thinks that some of the larger retailers will try to keep more consumer products on hand going forward as long as the coronavirus remains a risk, which could give a small boost to warehouse demand nationwide. But memories of crises tend to fade quickly, and industrial is no exception. 

“Assuming we handle coronavirus in the coming year, and there’s no additional pandemic in the next five years, I think there will be more comfort in going back to the traditional ‘just-in-time’ model,” Powers said.

After all, Powers said, unless there’s an active crisis, stockpiled goods are just taking up space — space that is going to become all the more valuable as e-commerce grows.

Matthew Powers will share more at NAIOP’s CRE.Converge Virtual conference, presented online Oct. 7-8, on a panel exploring the latest trends in e-commerce. Register here for the event.

This feature was produced in collaboration between the Bisnow Branded Content Studio and NAIOP. Bisnow news staff was not involved in the production of this content.