The Secret Life Of Product Returns Could Boost Industrial Leasing

E-commerce has simplified shopping for consumers, but it has also made returns significantly more complicated — and more common — for retailers. About 1 in 5 items bought online are returned, three times more than in-store purchases, necessitating an intricate network known as reverse logistics.

The nascent but growing business model requires support from not just retail locations but also industrial properties. Reverse logistics is still largely a niche use for industrial, but as it grows, it could provide a boost to the asset class, especially older properties. 

“The pandemic put under a magnifying glass all the things people assumed were just kind of magic,” said Chad Autry, the author of a NAIOP Research Foundation report on reverse logistics. “Reverse logistics has probably been going on at some really good companies for two or three decades, but it really only has captured the mind and attention of executives in the last five to seven years.”

Billions of dollars have been spent over decades optimizing traditional shipping networks to make them as cost-efficient as possible. But the strategies of scale employed by retailers and e-commerce giants to save on forward logistics don’t work as well in the other direction.

Shifting shopping habits have translated into a 5% annual increase in the number of returns nationwide since 2021, according to NAIOP’s report.

Third-party logistics providers, many of which provide reverse logistics services, leased more than 100M SF of U.S. industrial space from 2019 to 2023, according to a CBRE report. The global reverse logistics market was valued at $768B in 2023 and is expected to grow 4.8% annually through 2032 to more than $1T, according to Fortune Business Insights. 

Instead of working in pallets, to return products, retailers and logistics firms work in parcels. The initial intake of an item kicks off a series of specialized decisions based on the product type, with each choice leading to the next step in a branching path that could end with a new customer, a store shelf or a landfill. 

A reverse logistics facility is a hybrid between a warehouse and a small manufacturing facility, said Autry, a professor and supply chain researcher at the University of Tennessee, Knoxville. If the process is working, retailers are able to leverage specialized industrial space to help control costs, keep customers happy and have an eco-friendly story to tell consumers.

Like in traditional shipping, location is key in reverse logistics, Autry wrote in the NAIOP report, but site selection is heavily weighted toward proximity to customers rather than the port or rail access that might be prioritized in forward logistics. 

Interior warehouse flexibility is another key driver of site selection, in contrast to forward logistics, with fluctuating return volume and processing procedures necessitating a modular design. A 30-foot clear height is typically enough for a reverse logistics operation, and buildings with 36-foot clear heights aren’t cost-effective, Autry wrote. Second- and third-generation space is ideal. 

“An older build is probably a really good candidate for this kind of activity if it has infrastructure access and access to the consumer return point,” Autry said in an interview this week. 

The rising importance of reverse logistics can be traced to before the pandemic when Amazon and other e-commerce giants made a strategic decision to adopt free and seamless returns. Consumers have come to consider easy returns the default, forcing retailers to meet their expectations. 

“It's a nightmare for business that a couple of really big retailers have foisted on everyone else as a competitive lever,” Autry said. 

While the largest firms tend to handle the process internally, a nascent industry of third-party logistics firms focused solely on returns is forming to provide solutions in the space. 

Sylvia Ng founded ReturnBear in 2021, after a stint at e-commerce platform Shopify, to provide return services for apparel dealers. The Toronto-based firm is also in the U.S. and in June announced its expansion into the UK. 

ReturnBear is taking a page from Amazon, which allows customers to bring returns to participating Whole Foods or brick-and-mortar Amazon Fresh locations to instantly receive their refund.

“The hub-and-spoke model doesn't extend for when the things need to come back,” she said.

Instead, ReturnBear’s model requires some customer-facing retail presence, whether inside another store or as a standalone space that can also double as a processing facility. By returning the product in person, the customer is effectively replacing the role that a last-mile delivery driver plays in traditional logistics, Ng said. 

From there, the product begins a choose-your-own-adventure journey, starting with inspection. For ReturnBear, that means examining the item for defects and moving it into a specific workflow depending on whether it just needs to be ironed or dry cleaned, repaired or recycled. 

If the product is to get a second life, it is prepared for resale at the initial drop-off facility or at a nearby hub. If the clothing can be sold as new, it can stay at the facility and retailers can incorporate that inventory into their own forward logistics chain for when it is resold. That route also reduces the environmental impact of the return, a big component for reverse logistics providers.

“The magic comes into play when we're actually able to forward to the next consumer without having to actually batch ship that whole shipment back to a centralized warehouse for that brand,” Ng said. “That way, we're almost eliminating emissions by 40%.”

It also cuts down on shipping costs, especially for international retailers whose primary warehouses could be across an ocean. 

Addressing the issues of sustainability and cost is crucial to growing reverse logistics as an industry, Autry said.

“Until businesses begin to see this as a way of being more competitive versus just a cost producer, which I think we're still a generation of executives away from, it's never going to be treated with the respect it probably deserves,” he said.