While in-person retail sales, aside from key essential businesses like grocery stores, have significantly slowed during the pandemic, the decade-long trend of the growth in online shopping has only accelerated. According to a survey published by McKinsey Consulting, consumer e-commerce sales have increased 15-30% in most categories. The U.S. Census estimates that by the end of Q2 2020, 16.1% of all retail sales happened online as compared to less than 5% at the end of Q2 2011. Others estimate that it could be as high as 20%.
While there is no doubt the pandemic forced many late-adopters to finally shop online–and even holdout industries like groceries are seeing significant upticks in digital orders–the question now becomes, what does this shift in consumer behavior mean for the long run of commercial real estate? Once people are comfortable shopping online, will they give up that convenience to go back to brick-and-mortar retailers?
A pivot away from physical stores can have long-term effects on real estate values, and ultimately, on the returns that investors could expect to see over the term of their investment. But that doesn’t mean that e-commerce means the end of physical buildings, it just means the type of building, and ergo, the type of investment opportunities may change.
How E-Commerce Changes The Commercial Real Estate Landscape
According to Chris Caton, Head of Global Strategy & Analytics for Prologis, the largest owner, operator and developer of logistics real estate in the world, “E-fulfillment is among the most intensive uses of logistics real estate” and “Prologis estimates these customers require 1.2 million square feet of distribution space for each $1 billion in sales, which means e-commerce requires three times the space as traditional through-put distribution.” With the accelerated shift from in-person store purchases to digital purchases and the subsequent space requirements of e-commerce, we could actually see demand chasing industrial supply. This is especially interesting since the national availability rate of industrial properties is already just slightly above 7%, below the historical average over the last two decades according to a Q2 2020 CBRE report. This means that supply is tighter now than it has been in the past, and with the increased demand coming from e-commerce growth, we could see further tightening of the sector.
How is CrowdStreet Approaching E-commerce-Related Real Estate?
As we discuss in our Investment Thesis, we believe that the dramatic increase in online shopping will lead to heightened demand for last-mile distribution spaces for years to come, particularly in growing metro areas.
It also means a change in what industrial deal flow looks like. Investment in temperature-controlled warehousing, critical for shipping perishable goods like groceries, climbed from $560 million in 2016 to $963 million in 2018. The industry’s foothold pre-COVID was at 214 million square feet, but a 2019 CBRE report argued the demand for cold-storage warehousing space could grow by 50% by 2024. Due to COVID, we believe this number could be even higher. Because of the highly specialized nature of a cold-storage fulfillment center design, the commercial real estate market demand for build-to-suit warehousing has also increased dramatically.
Another niche commercial real estate asset class driven by e-commerce is data centers. Forbes reported that, amongst REITs, data centers were the only industry segment to “show a positive gain for the first quarter of 2020, growing by 8.8%.”
We are currently keeping an eye out for smaller industrial deals (typically sub-300K square feet) that cater to last-mile demand where we can find the appropriate risk/reward characteristics and located within growing metros. In addition, we are also seeking large distribution centers (600K square feet plus) located on the outskirts of these same metros. As most stabilized industrial properties trade at prices that are above replacement cost, we are increasingly pursuing ground-up development opportunities in locations where demand looks to outstrip supply for the foreseeable future.
What Do Investors Need to Understand?
Institutional-sized investors have historically scooped up industrial assets in the U.S., making access a true challenge for individual investors. But as National Real Estate Investor (NREI) reported last year, “There now appears to be more room for a different class of buyers in the industrial sector — high-net-worth (HNW) investors. Why? Because industrial opportunities in secondary and tertiary markets — where there is likely to be less competition from institutional investors with big pockets — have grown more attractive.”
E-commerce is not just growing, but accelerating relative to physical retail. Investors often think they need to play the NASDAQ to invest in e-commerce growth but commercial real estate has a path in highly aligned subsets of industrial. Add in the fact that, much of the activity and exciting deal flow is in 18-hour markets, which is now far more accessible to individuals, and the result is a major trend for investors in the upcoming real estate cycle.