Industrial Evolution: The Growing Role of E-Commerce in Industrial Real Estate Markets
Introduction
The rapid rise of e-commerce has drastically transformed consumer retail in the United States. As consumers increasingly turn to online platforms to shop for everything from electronics to groceries, the ripple effects of this digital transformation are felt far beyond the virtual storefronts. Industrial real estate is one of the industries most affected by the rise of e-commerce. The traditional role of warehouses and distribution centers continues to be redefined as they become critical components in the e-commerce supply chain.
This white paper examines the transformational impact of e-commerce on the industrial real estate market. We will discuss how growing e-commerce has changed industrial buyer demographics, surged demand for strategically located industrial properties, and increased the adoption of advanced technology in industrial facilities.
1. Changing Buyer Demographics
Increased Market Players
Traditionally, industrial properties were primarily sought after by manufacturers, wholesalers, and logistics companies. However, with the booming e-commerce sector, the profile of industrial real estate buyers has evolved dramatically. E-commerce companies' emergence and the increase of third-party logistics (3PL) operators have diversified the buyer demographic in the industrial real estate market. Industrial real estate has also gained popularity among investors due to its steady income potential and long-term growth prospects. Institutional investors, real estate investment trusts (REITs), and private equity firms have all entered the buyer pool and allocated significant capital towards purchasing industrial properties.
Changing Customer Preferences
The sudden addition of new market players has shifted preferences among industrial property buyers. E-commerce companies prefer industrial properties near urban city centers since they enable quick and cost-effective last-mile delivery to urban and suburban customers. The new industrial buyers also prioritize warehouses designed for efficiency. When purchasing warehouses and logistics facilities, clear heights, racking systems, and floor layouts tailored to streamline order fulfillment processes and maximize storage capacity are essential qualities buyers now look for. Location preferences have changed from open land spaces emphasizing facility size and storage space to properties centered near major transportation hubs that improve accessibility and connectivity to broader distribution networks. With the emergence of e-commerce in industrial real estate, buyer preferences have shifted to align with the functional needs of these modern companies.
New Buyer Behavior
The willingness of buyers to spend on industrial property has shifted significantly in response to the growth of e-commerce. E-commerce businesses have unique requirements that necessitate investments in strategically located properties, technology, sustainability, and long-term commitments. These factors have contributed to a change in buyer behavior, with a greater willingness to allocate substantial funds to acquire or develop industrial real estate that meets the demands of an e-commerce-driven economy. Due to the high premiums of acquiring current industrial property, buyers have also shown greater willingness to invest in longer-term developments due to expectations that these facilities will increase in value as the amount of available property and land for industrial use continues to decrease in the most favorable strategic locations.
Investors today demand more than just good returns; they seek transparency, real-time updates, and a level of engagement that was previously unheard of. Asset managers must adapt to these changing expectations by leveraging technology to provide more transparent and timely reporting. They must also be prepared to engage with investors through multiple channels, including social media and specialized investor portals, to meet the demand for real-time information.
2. Rapid Market Demand
Current Market Outlook
Despite greater economic and inflationary pressures, industrial real estate remains one of the highest market performers, with increased demand expected to continue over the next year. Unlike the rest of the real estate market, the industrial sector does not reflect the same high volatility, with a steady supply of pipeline projects continuing to acquire funding and move forward with development. Both investor and occupier demand remain near record levels, with the National Commercial Real Estate Development Association projecting 310 million square feet of industrial property to be occupied by the end of 2023.
Most In Demand Property Types
Distribution Centers: Distribution centers serve as regional access points for receiving goods from manufacturers and distributing them to smaller fulfillment centers or directly to customers. These centers are strategically located to optimize the supply chain and reduce transportation costs.
Fulfillment Hubs: These properties are large, high-ceiling warehouses where products are stored, picked, packed, and shipped to customers. The facilities are also ideal for storing a high product volume and implementing an automated picking and retrieval system. Demand for strategically located fulfillment centers near major urban areas has surged. Hubs enable faster response time and last-mile delivery to dense consumer populations, especially for e-commerce programs like Amazon Prime.
Technology-Enabled Warehouses: E-commerce companies increasingly integrate advanced technologies, such as automation, robotics, and AI-driven systems, into their warehouse operations. Tech-enabled warehouses are facilities designed to accommodate these technologies and meet the specific site requirements of 3PL and e-commerce companies.
Case Study: Amazon Fulfillment Centers
Amazon's extensive network of fulfillment centers is at the heart of its logistics operation. These fulfillment centers are near major population centers to facilitate quick and cost-effective delivery. They are essential for same-day and next-day deliveries, a key component of Amazon Prime's value proposition. Technology-enabled warehouses are another critical component of the Amazon business model, as artificial intelligence and automated systems are essential when streamlining operational tasks like sorting and shipping. The firm behaviors used by Amazon have set market standards for efficiency and transformed how firms use industrial real estate as part of their business strategy.
Real Estate Reuse and Redevelopment
To match sudden surges in real estate demand from e-commerce companies, industrial developers have transitioned to repurposing existing real estate buildings and land for e-commerce use. The revitalization of different property types to meet industrial needs allows developers to capitalize on market demand while their new facilities are under construction. Despite the potential profitability of using existing land and properties, developers must invest significant capital in retrofitting these sites to meet the specialized needs of e-commerce operations.
Short Term Effects of Market Demand
The short-term effects of the current market environment for industrial properties is characterized by rising rental rates, reduced property availability, competitive bidding wars, and shorter lease terms for tenants. These short-term impacts reflect the dynamic and competitive nature of the current industrial real estate market in response to an evolving customer base and shifts in buyer behavior.
Rising Rental Rates: With the high demand for industrial space, short-term rental and lease rates have soared as landlords capitalize on the strong market demand and low property availability.
Reduced Availability: With increased demand, available industrial properties have become scarce, forcing companies searching for existing properties to either delay their plans or pay a higher market premium. Tenants in desirable property locations are also faced with higher lease prices or greater incentive to sell their existing properties to take advantage of extremely high valuations.
Competitive Bidding: Competition between companies and investors looking to secure industrial properties has resulted in more competitive bidding driving lease and purchase prices to far exceed projected market prices. Rental rates for industrial property leases also experience the same pricing pressure due to the highly competitive market environment.
Shorter Lease Terms: Due to the higher prices and uncertainty surrounding future market rates, some industrial real estate buyers opt for shorter lease agreements that allow for more flexibility but increase future risk for these customers.
Long Term Ramifications
Due to the immediate high demand for industrial market space, real estate analysts project an influx of available spaces within the next five years, as customer demand is unlikely to remain at its current levels. Increased economic pressures spurred on by higher interest rates and persistently high input costs also indicate the cost of capital for e-commerce, logistics, and manufacturing companies will continue to rise. With higher costs of capital and operating expenses, most industrial property buyers will look to maintain or reduce their current position rather than expand by purchasing new properties. Greater property availability paired with less incentive for potential buyers points toward stagnation in market demand, with Deloitte Solutions projecting a 0.9% demand decrease by the fourth quarter of 2023 (see Appendix A).
3. Adoption of AI & Advanced Technologies
Technology Integration
E-commerce’s emphasis on speed, efficiency, and data-driven decision-making has driven technology adoption in industrial real estate. Industrial developers and lessors have begun integrating new adaptive technologies, namely systems driven by artificial intelligence, into their properties to match the specific facility requirements of their largest growing customer base.
Impacts of Integrating Artificial Intelligence
To match the growing technology requirements needed by e-commerce clients, new organizational and logistics systems supported by artificial intelligence are being rapidly integrated into industrial properties in high volumes. These AI-powered developments continue to change industrial real estate buildings and their functionality.
Advanced Warehouse Management Systems(WMS): Industrial tenants, especially e-commerce companies, rely on sophisticated WMS systems to track order processing, packaging, and shipping. Using real-time data systems powered by artificial intelligence streamlines company operations and allows tenants to utilize their facility space best.
Automation: E-commerce companies use efficient automated inventory and fulfillment processes to meet logical demands and rapid order processing. These requirements have led most industrial developers to construct facilities compatible with automated technology systems used in e-commerce warehouses and distribution centers.
nventory Management: AI algorithms are used in e-commerce facilities to optimize inventory levels and minimize product carrying costs. These services are essential for tenants with wide inventory catalogs.
Last Mile Delivery Optimization: The focus of e-commerce companies on last-mile delivery efficiency has led to the development of AI routing and delivery optimization systems. These systems help reduce deliveries and produce optimized routes for navigators from their industrial sites.
Tenant Experiences: AI-driven building management systems are used to enhance tenant experiences in industrial properties, offering features like automated access control, personalized climate settings, and tenant services.
Changing tenant expectations driven by the entrance of more e-commerce companies has spearheaded the adoption of technology and artificial intelligence in the industrial real estate sector. These advancements improve the operational efficiency of tenants and influence industrial property design and management practices to best meet the specific demands of e-commerce companies and their customers.
Future Outlook
As online shopping and consumer expectations continue to evolve, industrial properties must adapt to meet the changing demands of e-commerce companies. Developers, property owners, and investors who stay attuned to these trends and anticipate the market's evolving needs will likely thrive in this dynamic sector. Continued consumer demand for online shopping and mobile delivery will require e-commerce companies to grow their logistics space. As online order fulfillment necessitates higher nominal inventory levels due to the product variety and parcel shipping requiring more space than palletized shipping, customer demand for e-commerce will increase industrial space development, expansion, and revitalization.
Conclusion
E-commerce's continuing growth and its influence on consumer behavior has propelled industrial real estate into a new era of buyers, demand, and innovation. Driven by the growth of e-commerce, industrial real estate has become a vital component of the global supply chain, facilitating the seamless flow of goods from manufacturers to consumers.
With the rapid increase in consumer demand, e-commerce has increased the number of buyers in the industrial real estate market by driving demand for various industrial properties. The desire to fulfill growing consumer needs has attracted e-commerce giants, third-party logistic providers, and other distributors to demand more industrial property. Increased private equity investment in the industrial sector also diversified the buyer pool while driving up market competition. With the entrance of new market players, buyer preferences for industrial property have shifted to reflect the growing importance of urban facilities that enhance efficiency and optimize logistics.
As e-commerce continues to expand, so does the demand for strategically located distribution centers, fulfillment hubs, and tech-enabled warehouses. This heightened demand has reshaped the industry, resulting in increased property values, competitive bidding, and innovative property redevelopment.
Technology integration has become essential for developers and lessors to remain competitive in the highly valued industrial real estate market. The rapid growth of e-commerce created new demands for logistics and distribution sites, spurring the adoption and integration of advanced technologies in the sector. With the sudden shift caused by growing e-commerce demands, industrial real estate has also adapted to prioritize speed, efficiency, and data-driven decision-making using adaptive AI technologies.
With a constantly changing market and an ever-growing demand, industrial real estate has become a dynamic and transformative market space due to the prominence of e-commerce revolutionizing the sector. For investors, developers, and businesses, the presence of reliable firms that can help solidify their industrial real estate projects has become even more critical as the market continues to evolve.
Before founding 3E in 2016, Managing Member Eric Bergin was Director at Rockpoint Group, where he was responsible for for the Finance Group, as well as acquisitions, asset management, and investor reporting activities.