E-Commerce Transforms Retail, Fuels Growth in Industrial Warehouse Properties

As online retailers jockey for position against their traditional “bricks and sticks” counterparts, survival frequently depends on how, and how quickly, retailers get their products into their customers’ hands. Whether products are purchased in a store or on-line, the goal of each retailer is to reduce delivery time from days to hours.

Traditional retailers such as Target or Wal-Mart have established high standards of home delivery as they reduce the size of their in-store inventories, store size and number of stores. Properties that formerly contained large inventories of merchandise have been transformed into virtual showrooms, drastically reducing inventories. Products purchased in the store are delivered to customers from nearby warehouses.

“In the past few years, most of the land available for warehouse development has been gobbled up by the demand for data centers.”

Even grocery stores have joined the fray with online shopping. The purchased groceries are available for pickup at the store, or delivered to the home, competing with AmazonFresh which recently entered the grocery business. Liedl, a European grocery chain that is just entering the American market, has recently leased a 900,000 square-foot distribution center in Fredericksburg for local business.

At the same time, online competitors, such as Amazon, have begun supplementing their large regional warehouses and fulfillment centers with smaller facilities closer to their customers. Those “local delivery stations,” and also local retail outlets, or “package pickup centers,” provide places where consumers can inspect and order their products or claim their purchases.    

Borrowing a page from successful pizza delivery systems, retailers may soon be making deliveries by Uber-like drivers, or even drones, further reducing their costs of maintaining huge fleets of delivery vehicles. As virtual reality applications become more common, customer shopping may be further simplified, as a trip to the local retailer may become as convenient as using a home computer to “virtually wander” through store aisles selecting merchandise.

As retailers race to find the best balance between online and instore sales to reach their customers, there is a profound impact on commercial real estate fueling rapid growth in the industrial/warehouse sector. Although current Northern Virginia retail vacancy rates have remained positive at less than 5 percent, vacancies in the warehouse sector have similarly inched down from a historical low of 10 percent to about 7.5 percent.

“Northern Virginia has not been known as a strong distribution center,” explained Max Peker, retail market analyst at commercial real estate research firm CoStar Group. In the past few years, most of the land available for warehouse development has been gobbled up by the demand for data centers.

“Big box” retailers and department stores have discovered that they are spending too much money to lease or own more retail space than they need. “Most new retail development in Northern Virginia has been in smaller mixed-use developments,” Peker noted.

“The explosive growth in e-commerce has caused the demand for industrial space in warehouse, distribution and fulfillment centers to soar, as online competitors race to snatch up warehouses of various sizes, closer to their customer base.”

Meanwhile, the explosive growth in e-commerce has caused the demand for industrial space in warehouse, distribution and fulfillment centers to soar, as online competitors race to snatch up warehouses of various sizes, closer to their customer base in order to store and process inventory in  their markets.

Amazon, founded in 1994 in Chief Executive Jeff Bezos’ Seattle garage, now has a market cap of $390 billion, making it worth more than the largest eight traditional retailers combined, including Walmart, Nordstrom, Best Buy, Macy’s and Sears, according to a recent Credit Suisse report by financial analysts. Amazon continues to use its facilities in Richmond as its main distribution center, but added hundreds of short-term employees in a smaller center in Herndon to handle the onslaught from 2016 Christmas shoppers.

“One winner in the competition between e-commerce and traditional retailing will be warehouse space,” predicted Chuck DiRocco, CRE, CCIM, FRIC, director of research at Altus Group, an independent industry advisory group for commercial real estate. “Industrial/warehouse has just been a very hot market in the past year or two,” driven by the growth of e-commerce, he explained.

With land near urban markets becoming increasingly scarce, investors and developers are considering upgrading older facilities. Even former “big box” stores can become attractive targets for redevelopment as distribution centers with their extensive parking and prime locations, essentially making warehouses the new retail. “There are opportunities, and the price is right,” DiRocco noted.

“Years from now, when we look back at the recovery that followed the Great Recession, e-commerce will certainly emerge as a major force that transformed the commercial real estate industry,” wrote Margarita Foster, editor in chief of NAIOP’s Development magazine, in the Winter 2016/2017 issue of that publication. “Creation of a new product type—the mammoth, modern fulfillment center—along with a new distribution network that is still in the works will be one of the hallmarks of the economic cycle,” Foster wrote.

As Realtors® respond to their retail clients’ changing needs, they will need to balance the information-based, distribution-driven future with the available traditional retailing facilities, while finding creative new uses for buildings unsuited to either sector.