The recent shift from brick and mortar to e-commerce appears to finally be taking shape and having a profound impact on the industrial sector.
The Wall Street Journal article entitled “Online Retail Gives Industrial REITs a Lift” acknowledges that industrial REITs have risen more than 17 percent year-to-date compared with just six percent for all equity REITs. While certainly a multitude of factors affect this, such as over/under development, occupancy increases, et cetera, it seems a major contributing factor is e-commerce-related tenants filling up industrial space.
It is important to note that this is simply a shift of where goods are stored and not a driver of the overall economy. If an average American consumer needs to buy a washing machine, they now have the choice of buying it online or at a brick and mortar retail store. The consumer is not going to buy two washing machines just because it’s available cheaper on Amazon.com. If the American consumer has $100 to spend on an item, and he or she can find the same item for $80 online, then the consumer now has a perceived $20 in extra spending power. What remains unanswered is will the consumer spend the full $20? If so, that is good for the economy. Will they save it? Will they buy $25 worth of merchandise because of the perceived savings?
Industrial developers are certainly building larger buildings to accommodate the regional e-commerce distribution model where a typical size is one million square feet for an Amazon or Wal-Mart distribution center. Nationwide, there were 32 deliveries of one million-plus-square-foot industrial buildings in 2015 compared to 21 buildings delivered in 2014, which tied the previous one million-plus-square-foot records of 2008 and 2007.
What retailers are scrambling to figure out is the “last mile” delivery of goods ordered on-line. The one million-square-foot distribution centers need to be located as close to major population bases as they can, but the goods still need to get from a one million-square-foot distribution center down to a smaller, more local warehouse. From there, a variety of delivery methods are being tested including drones, Uber-type delivery services, bicycle delivery, vehicles and more.
Green Street Advisors analyzed U.S. Census Bureau data and determined that, in 2015, seven percent of all U.S. retail sales were transacted online versus 3.9 percent in 2009. Said another way, with $92.8 billion of online sales in the first quarter of 2016, during the five minutes you spent reading this article, there were more than $3.5 million in online purchases made across the U.S.
While this is a tremendous growth curve and one that should continue, there is a caveat; reverse logistics is emerging as a wrinkle in the e-commerce road to profitability. Many online shoppers – especially those buying women’s apparel – will purchase two or three of the same item in order to try on each one and return those items that do not fit. With some retailers offering free returns, this is beginning to account for a larger portion of the logistics model. How retailers deal with reverse logistics and make it easy for the consumer yet still profitable for the business remains to be seen.
The industrial capital markets seem eager to purchase the income streams of e-commerce users, which are causing capitalization rates on core deals in core markets to decrease faster than those in secondary markets and for non-core product. While the e-commerce landscape may look drastically different five to 10 years from now, almost everyone is in agreement that the shift from brick and mortar retail to online is a real shift that is occurring. So, as long as developers continue to not overbuild, it’s full steam ahead for the industrial sector!
HFF is one of the top-producing capital markets intermediaries in the country for industrial assets, having closed more than $30 billion in over 1,700 transactions since 1998. HFF has approximately 112 industrial specialists who are experts in marketing industrial properties for sale, locating industrial real estate for sale, securing construction financing and arranging interim and permanent debt alternatives in addition to arranging equity placement solutions, including joint ventures, participating debt and mezzanine financing and ground-up development capitalization. The firm has experience in securing transactions for all types of industrial assets, including bulk warehouse, flex, R&D, manufacturing, cold storage and telecommunications.
Marty Busekrus is a director in HFF’s Miami office and is in charge of industrial investment transactions throughout the southeastern U.S. In this role, he is responsible for sourcing industrial opportunities by partnering owners with potential capital sources for joint ventures, debt solutions and/or buyers.
Prior to joining HFF in December of 2012, Mr. Busekrus was a senior associate in CBRE’s Private Capital Group and focused on the dispositions of office and industrial projects throughout Southeast Florida. Mr. Busekrus got his start in commercial real estate at NAI – Rauch Weaver Norfleet Kurtz & Co in Fort Lauderdale, where he specialized in investment sales and was the number one sales producer for two of the four years that he was there.