The news frequently covers the ongoing retail market disruption. Numerous well-known retailers have shuttered doors due to online shopping competition. However, e-commerce’s impact goes beyond outlet centers and shopping malls. Increased e-commerce demands are driving low vacancy rates and higher leases in the industrial real estate market.

The big shift

While e-commerce sales make up a small piece of total retail sales– just 8 to 10 percent, says CoStar Portfolio Strategy Director Rene Circ– it continues growing. Since 2010, e-commerce sales have increased 15 percent. Nielsen predicts total retail e-commerce will grow by 20% to be a $4 trillion global market by 2020.

Naturally, continuous growth means e-commerce retailers need places to warehouse and distribute their goods. Retailers seek to compete with Amazon Prime’s two-day shipping. This means brands must strategically locate product near population centers.

The E-commerce Warehousing Challenge

Existing space is at a premium in many urban locations across the country, including California.  PWC reports, “vacancy rates fell farther below 5 percent in 2017. Aside from simple competition, there are submarkets where users simply cannot secure new space.”

As we know from basic economics, low supply and high demand drives prices higher. Industrial rent growth along the West Coast is reporting year-over-year, if not quarter-over-quarter gains, since 2015.

More interest in development.

While manufacturing received a “fair” outlook, “fulfillment” and “warehouse” centers were the top investment prospects for all commercial real estate subsectors in 2018 according to PWC’s Emerging Trends Survey. The need for more warehousing and fulfillment centers, and with little slowdown in expansion predicted, is driving more investors into the industrial space. PWC ranked industrial as its top sector for investment and development for 2018, and for the previous four years.

Additionally, more developers or businesses are looking at a build-to-suit option rather than leasing existing space. With industrial spaces commanding top prices, acquiring an existing new building may not be as cost-effective. Larry Harmsen, Prologis’ COO, Americas told Commercial Property Executive, “the firm is developing more built-to-suit assets, which is “different than the last couple of cycles.”

Location Matters

Warehousing and fulfillment centers used to lie outside population cores. Not so anymore. The restructured commerce supply chain means retailers want a more efficient and faster delivery process. That means locating goods right where consumers live. Businesses are willing to pay for urban warehouse space to get their products quickly into the right markets. Even how industrial space looks is changing. Prologis is building the first vertical warehouse space in the United States, and predicts more are on the way as demand increases.

Shopping Changing Industrial Real Estate

CoStar’s Circ notes while e-commerce may still be a small part of the overall warehousing market at 4 percent, but it’s the force driving net absorption. The consumer online buying trend will continue shaping the development of the industrial real estate market in the coming years.