E-commerce’s impact on the U.S. industrial market had been notable during the extended expansion cycle from 2010 to early 2020. During the pandemic recession, it became even more obvious. E-commerce companies had accounted for 28.2% of all industrial absorption from 2016 through 2019, and that number increased even more to approximately 40% from 2020 through 2021 as COVID-19 shifted consumer shopping patterns to more frequent online purchasing. In 2020, a record 97.5 msf were leased directly by e-commerce occupiers, while another 77.1 msf were transacted throughout 2021. These totals are even more robust when 3PL’s, who directly support online retailers, are included.
Regionally, when compared to the previous year, e-commerce demand fell across the South and West while remaining steady in the Midwest and Northeast. Some of the annual declines were partially due to historically tight vacancy rates across the country with very limited Class A supply for e-commerce occupiers to lease. The markets where e-commerce companies expanded rapidly over the last two years were Atlanta, Indianapolis, Chicago, Northern New Jersey, Central New Jersey and Houston—accounting for 33% of the total e-commerce demand recorded in that time (versus accounting for only 21.6% of total inventory). Meanwhile, e-commerce leasing accelerated from 2020 into 2021 in markets such as Cincinnati, Louisville, Milwaukee, Baltimore and the PA I-81/I-78 Corridor.
Over the last two years, the sweet spot for e-commerce demand has been facilities ranging from 500,000 square feet (sf) to 1.0 msf as the appetite for large distribution centers has persisted. Meanwhile, demand for warehouses greater than 1.0 msf fell by 23.7% from Q4 2020 to Q4 2021 due in part to the dwindling options for spaces of this size. Throughout 2020 and 2021 combined, 110 transactions in that size range were completed nationwide, 35 of which were by e-commerce occupiers. However, for smaller spaces (less than 300,000 sf), the deal volume by e-commerce companies was steady from 2020 to 2021. Much of the recent absorption totals by these firms have been within Class A facilities as the need for high ceiling heights, amenities and ample parking have been at the forefront in site selections.
E-commerce: Is there a limit to growth levels?
As consumers become more accustomed to purchasing online, their expectations with regards to delivery service and speed mount. Transportation costs account for nearly 65% of total logistics costs, making it the focus of any strategy aiming to reduce supply chain costs. Inefficiencies converge around transportation, especially in dense urban areas. For e-commerce occupiers, reducing the delivery distance to 30 minutes or less is critical.
Because e-commerce fulfillment is much more space intensive than traditional warehousing, the long-term structural growth rate of logistics real estate has increased in tandem with the growth of e-commerce, and this is expected to continue. Digital sales soared in 2020 amid the pandemic and grew by 14.6% in 2021, equating to $870.8 billion being spent online.
Online sales surged more than four and a half times faster than total retail sales in 2020, growing by a staggering 31.8%, the highest annual growth of any year and more than double the sizeable 14.1% jump in 2019. That propelled U.S. e-commerce penetration as a percentage of total core retail sales1 to a record high of 21.9% by Q2 2020, at the height of the pandemic and lockdowns. Although roughly one-fifth of spending continues to come from digital orders, the e-commerce share of core retail sales has declined to 19.1% as of Q4 2021. This is more a reflection of the significant rebound in brick-and-mortar sales that has steadily occurred as the economy reopened. There is still a lot of runway left for continued market penetration and growth.
Indeed, online sales for categories that were more traditionally brick-and-mortar-oriented recorded some of the fastest growth rates throughout the pandemic—that is, from Q4 2019 to Q4 2021. In contrast, traditional e-commerce retailers, called non-store retailers, recorded sales growth of 43.3% from 2019 to 2021, with their online market share increasing by only 1.6 percentage points to 45.8%.
It is now safe to say that the online shopping trends brought on by the pandemic are the new normal, and many retail categories have plenty of runway left to go.
Supply chain investments made due to the ongoing pandemic such as technology, automation and strategic site selection, are likely to support increased digital sales in the future. This is especially true for segments that had low e-commerce penetration prior to the pandemic that had also recorded significant increases in online market share, such as the grocery and home improvement categories.
E-commerce fulfillment requires intense use of logistics space, often demanding three to four times the logistics space of traditional brick-and-mortar retail replenishment. Online order fulfillment necessitates higher nominal inventory levels given the product variety and the fact that parcel shipping requires much more space than palletized shipping. Furthermore, e-fulfillment often includes other value-add services such as assembly and reverse logistics.
What’s Next for E-commerce?
As available Class A space inventories diminished over the last few years, e-commerce tenants have been extremely active within new construction and development sites, willing to pay higher rents for new, modern logistics space in key locations. Cushman & Wakefield is anticipating total industrial demand to remain robust as roughly 800-850 msf of space will be absorbed from 2022-2023. E-commerce occupiers are projected to continue to account for between 35-40% of this demand as consumer shopping habits will not reverse course from the current upwards trend.
As market conditions are anticipated to remain at historically tight levels, despite the plethora of new supply expected to deliver in 2022 and 2023, e-commerce and other top occupiers of warehouse space will be pushed to focus on new development options, which boast premium taking rents. Rent growth for warehouse and logistics space should rise by more than 15% over the next two years with Class A and new construction rents expected to grow at an even higher rate.
1 Core retail sales exclude spending at restaurants, bars, gasoline stations and spending on autos/auto parts. At present, online sales are only about 4.0% of the total auto/auto parts market.
