Building for E-commerce: Challenges, Benefits and Lessons Learned
Total e-commerce sales for 2015 reached $341.7 billion according to the U.S. Department of Commerce – and online sales are only expected to continue increasing. How can developers benefit from this retail revolution? E-commerce and its impact on commercial real estate was the topic of discussion for a panel at NAIOP’s Commercial Real Estate Conference 2016, led by moderator John Morris, SIOR, executive managing director of logistics and industrial services lead for the Americas with Cushman & Wakefield.
The panel of e-commerce experts: Kim Snyder, president of the Southwest Region with Prologis, Inc.; Jonathan Tratt, principal of Tratt Properties, LLC; and Todd Watson, senior vice president with DCT Industrial Trust.
“E-commerce is sizable and revolutionary in many ways – and it’s changing every day,” said Watson. Amazon may dominate the e-commerce conversation but e-commerce figures into many companies of all shapes and sizes. Snyder noted that 20 percent of net new deals for Prologis have an e-commerce component, whether it’s last mile or a fulfillment center. “It’s a tailwind to elongating the cycle for industrial,” he said. Tratt said that e-commerce comprises two thirds of his company’s portfolio. Williams-Sonoma is one of his tenants and is a prime example of a company that has evolved its focus from catalogue- to e-commerce-driven sales to keep pace with changing consumer habits and expectations. E-commerce has proven to be adaptable and consequentially become very strong. An example of this is the impact of the SMAR7 Apps has had on the online market. The online market is as big as the ocean. There are swathes on businesses competing against each other in order to thrive. Ways that they can get ahead is through the adaptation of new technologies such as low code development, as offered by Salesforce. Doing so might help E-commerce to have a continued impact. What has proved integral to E-commerce is having very capable web hosting that will enable businesses to thrive exponentially. Somewhere like www.hostiserver.com might be able to provide this.
E-commerce impact by the numbers:
- E-commerce has accounted for 24 percent of activity since the start of 2014.
- E-commerce- and E-tail-related firms leased 19 million square feet of deals so far in 2016, up 31 percent from the prior year.
How are e-commerce buildings unique? What is the impact of CRE capital deployment/project decision processes?
Buildings like Amazon require a sophisticated industrial design and require a high volume of parking, said Tratt. An extensive parking lot that might sit mostly empty for seven or eight months of the year will fill up during the heavy retail season when the company hires thousands of temporary workers. Amazon put in 36- to 40-foot clear heights in their space to accommodate their needs.
Prologis, Inc. has 50 million square feet of e-commerce customers, mostly new construction, said Snyder. “That volume has earned us an education on what we need to do on the design side: clear height is a key component; cross-docks are an important component; we are having to add incremental parking.” A critical factor: power. For some companies, Snyder said, “the rent is not as much as the utility bill they pay on a regular basis.”
“Our biggest issue on these larger buildings is how you plan ahead when they need to expand, with additional parking or other space,” said Watson. Natural light, additional power and LEED sustainability are important to consider as well, he added.
Who are the winners and who are the losers?
“Amazon is clearly winning,” said Snyder. “They made the first step into market penetration and did a lot of loss leading over their competitors.”
“The winners are clearly the consumer, as well as industrial developers and landlords,” Tratt said. Amazon has changed the consumer mindset by speeding up delivery expectations, and other companies – by necessity – follow suit, he said. “Amazon has continually evolved, learned and grown.” The losers, meanwhile, are retail stores, said Tratt; those that haven’t developed a click strategy are in trouble.
“Trying to out-Amazon Amazon isn’t working for most companies,” Watson said. The grocery delivery segment has particular challenges, he noted; in spite of its popularity, the meal-kit service Hello Fresh has found it’s too expensive to deliver fresh produce to its customers.
What is the impact of “bricks and clicks” evolution on 3PL delivery models?
“What we’re finding is a lot of the global 3PLs have good infrastructures and know how to manage clients,” Snyder said, which attracts big e-commerce companies. “The stuff that kills e-commerce is returns,” he said. “In the case of fresh [deliveries], it’s a disaster if you get the delivery wrong because it doesn’t make sense to have the customer return it.”
You can manage your entire supply chain, use a total third party or take a hybrid approach,” said Watson. “We are always trying to look forward to the future based on what happened in the past, and we can’t continue to do that.” Companies will have to rely on third parties, otherwise behemoths like Amazon will squeeze them out of the competition.
What is the “bricks and clicks” impact on asset values?
When looking at acquiring assets, his company considers several factors, said Watson, including replacement value and whether – or for how long – they can anticipate retaining e-commerce tenants. “These e-commerce users have invested so much in technology and automation that most won’t want to leave for a new location,” he said.
Another factor: what it would take to re-tenant a building after the e-commerce company leaves. “You have additional land with many of them so you can do a lot with that,” Watson said. “Who knows what to expect down the road, though. Right now, e-commerce is the hot topic, but in 20 years, it may be aquafarming (I’m kidding but look for that).”
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