The global health crisis impacted many industries including the world’s supply chains. As more people pivoted to shop online — still the preferred shopping method for nearly 70% of consumers — impacts to the ecommerce sector have also affected the commercial real estate industry.
Ecommerce proved to be the safest way to shop during the pandemic. From groceries and furniture to clothing, cosmetics and toys to electronics, medicine, cars, and homes, there is very little limit to what products you can buy online.
However — just because you could see products listed on various websites didn’t mean the products were available (or would arrive in a reasonable amount of time). What appeared a boon for ecommerce initially created a cascade effect to create the mother of all supply chain snarls:
- Issues with labor shortages
- Trucking and shipping restrictions
- A lack of warehouse space
- Faltering logistics
- Supply shortages
- Production delays
That said, the continued popularity of online shopping has created a prime opportunity for ecommerce businesses to capitalize on consumer demand. While supply chain issues may continue to create road bumps, ecommerce offers an opportunity for CRE investors to profit from commercial property portfolios in seaport cities and areas with the space to construct additional warehouses. Here’s how.
Warehouse Space Demands Continue
To mitigate potential inventory shortages resulting from current or future supply chain disruptions, businesses reliant on ecommerce are upping their stock. But to store it requires additional warehouse space. That increased demand is driving property prices up — to the benefit of CRE investors.
Most experts agree that low vacancies and high rents within the industrial real estate market will continue through 2023 as companies opt to main larger inventory on hand hoping to avoid supply issues resulting from stockouts or supply chain issues. Yet material and labor shortages continue delaying the construction of new facilities and upgrades of existing older buildings.
Growing Demand for Flex Spaces
Flex spaces offer companies the flexibility their name suggests, serving combined functions as office and warehousing spaces. It’s more cost-efficient for many ecommerce businesses to streamline their operations to one area, hosting them in a flex space.
With the continuation of hybrid work environments, demand for office space has similarly declined. But the need for flex spaces provides a good opportunity for CRE investors to convert commercial office properties to better meet demands for more warehousing — and increase their properties’ attractiveness in the current hot CRE market.
Updates to Distribution Center Design and Layout
Just as the demand for flex spaces has grown, so has the need to update distribution center designs and layouts. But doing so adds opportunities for more automation, which increases operational efficiency.
Design is evolving as warehouses adapt practices to meet fluctuating demands. Some companies are pivoting to an on-demand business model, which increases storage capacity. UPS has a Ware2Go tool helping shipping companies find on-demand warehousing, for example.
Innovative new technology is helping drive the automation of more warehouse operations as a supplement — not a replacement — of human workers. Artificial intelligence and machine learning can help specifically with pallet shuttling, stacker cranes, and sorting processes. High-capacity forklifts, while still reliant on human operators, may one day be able to operate without a driver, although that technology is still a few years off.
Property Value Near Ports Increasing
Some of the most valuable CRE property today sits near and around the ports and air hubs. Logistics management and transportation of goods is much easier for companies to control from properties close to airports, inland ports, and seaports. CRE investors have an opportunity here to maximize their profits.
New York and New Jersey ports rank 4th out of the top five ports in YOY rental growth, at 26%, in the U.S. Ports market. Throughout 2022, the two states’ port market has had among the lowest vacancy rates, and a lack of available land for development is predicted to keep prices high. Experts predict 2022 to finish on a high note, with industrial rents at an average of $12,209 per square foot (about 45% higher than the U.S. average of $8.36). New Jersey’s warehouse rents in the Class A logistics space were $20 per square foot — in some cases as high as $30 — for new construction projects near and around the ports, according to a recent report by Cushman & Wakefield.
Last-Mile Location Demand Rising
Ecommerce companies that want to keep prices — and goods transport — manageable are turning to last-mile sites. These areas are located closer to the customers the companies serve. By reducing the distance and time to travel between warehouses and customer bases, last-mile locations help to decrease last-mile truck, fuel, and labor costs.
A recent Technavio market study expects that between 2021 and 2026, the last-mile delivery market share will increase by $143.75 billion. It will also undergo a renewed focus on environmental sustainability, with increased use of electric vehicles and advanced technology to optimize route planning and deliver improved customer service.
Industrial Real Estate Construction Growth
Another important element in the ecommerce boom, manufacturing has grown as well. To mitigate the risk caused by supply chain disruptions (and reduced access to necessary materials for producing goods), companies are opening new manufacturing and production facilities.
Industrial real estate properties will remain a popular investment for CRE companies, who will likely build even more facilities to accommodate the increased demand. Other verticals within the CRE sector will see an increased demand for smart buildings designed to facilitate automation and operational efficiency, which drives ROI and increases profit margins.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
