EMERGENCE OF E-COMMERCE AND TECHNOLOGICAL IMPACT ON INDUSTRIAL REAL ESTATE
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Since its inception, the internet has changed almost every aspect of how we navigate our lives. From streaming media to catching Pokemon, the internet has evolved our most traditional social and professional platforms. Most notably, we have taken a stark shift away from brick-and-mortar stores and advanced to online shopping. With services such as Amazon Prime or Uber Eats, we can now have what we want, right when we want it. As a result, these trends in technology have a unique effect on commercial real estate, impacting investors, tenants and brokers alike.
Come and knock on my door.
With traditional brick-and-mortar stores, the most essential players in the supply chain is typically comprised of the manufacturing companies, distribution center networks and transportation services. This team works in unison to ensure the timely delivery of goods to stores. Today, the relationship between retailers and customers have evolved. The emergence of a new retail model known as electronic commerce (e-commerce), has experts predicting that online sales will increase up to 11% by 2018. This click to knock paradigm is changing how we purchase products and services, from dog walkers to groceries and almost everything in-between. The most obvious difference between traditional retail supply chains and that of e-commerce is the complexity involved in the delivery process. It is now expected of online retailers to deliver goods through a variety of mediums and deliver them anytime, anywhere.
The need for fast delivery through the click to knock strategy has changed the way traditional retailers fulfill orders through their networks. According to the NAIOP Research Fund, Amazon currently ranks at the top of the Global 500 e-commerce sites in terms of sales volume. Their success has been attributed to their ability to ship products within 2.5 hours of a customer’s online submission. Amazon utilizes revolutionary order-management algorithms to calculate the customer's location, product availability and inventory location that makes way for an expedient delivery service.
The process is quite complex, involving many moving parts that work in correspondence with one another. However with facilities optimally located, in combination with the right ground networks of major delivery firms, it is possible to reach the entire U.S. within a three-day delivery window. Amazon and other online retailers are occupying and building out tens of millions of square feet of warehouse space so that they can deliver even quicker to dense market areas. Falling in line with this trend, retailers are factoring in this click to knock paradigm when developing their real estate strategies.
As they say, it’s all about, “location, location, location.”
Industrial Real Estate is now on-demand.
The boom in e-commerce has created a demand for new industrial spaces with very unique needs. Technology has obviously impacted the way commercial real estate markets operate, but the debate is not why, but how. Industry analysts from Yardi Matrix note that this shift is slow to take root because commercial real estate typically operates as it always has. Generally speaking, the structure of the market is unchanged - commercial landlords lease the same basic property types, buy and sell based on cash flow projections and take out mortgages. However when it comes to real estate and technology, it’s all about demand.
The click to knock paradigm has evidently created a shift away from brick-and-mortar stores, leaving retailers struggling to keep a presence. Some will be able to adapt, others will fade into consumer oblivion. According to the Wall Street Daily, store closings and consolidations are cutting back the demand for retail space. Retail vacancy rates remain nearly 3% above where they were before the Great Recession. There is a surplus of commercial real estate space out there, but you wouldn’t know it from looking at at the numbers.
The U.S. Commercial Property Price Index has more than doubled since 2009. The latest data shows that in June 2015, the index rose 11.3% on a year-over-year basis. The boom in e-commerce has created a new demand for industrial space in markets. These facilities have different needs - higher ceilings, additional dock doors, more restrooms, greater space for picking and expansive parking. Companies are choosing facilities located closer to major airports and ground transportation networks for more efficient ways to ship products. According to the NAIOP Research Foundation, “demand for newly build, large distribution centers that cater to e-commerce has been particularly robust in this recovery and industrial construction actively has been rising. In the past four years, the warehouse sector has delivered 170 million square feet of new development to satisfy this demand.” At the end of 2014, U.S. industrial vacancy dropped to its lowest level in nearly 14 years.
Let’s get smarter with smart tech, and smart investments.
Retail and e-commerce has been remarkably impacted by the advancements in technology, resulting in unique demands from the commercial real estate industry. Not only is it changing the needs of our clientele, it’s evidently transforming the way we conduct business. Real estate tech is reshaping the very foundation of how we buy, sell and manage property. CB Insights utilized its data and analytics to identify the most evolved areas of the real estate tech ecosystem.
CB Insights found that property listing and search services are the most prominent in its category. This platform provides users with the ability to search for residential and commercial real estate listings all over the world. These businesses give agents and brokerages a place to showcase their assets, providing users the convenience of looking for residential or investment properties from the comfort of their home. Some of the most well-known companies include Zillow, Estately and 42Floors. The second most influential category is virtual property viewing, companies that produce photo and video content, as well as 3D models of physical spaces. Sometimes using drones technology, the creative enhances tenant and investor experiences, elevating the traditional remote tour. The third most influential category is tech-enabled brokerages, businesses that employ in-house brokers with their own listing services. The various platforms allow brokerages to effortlessly facilitate the buying and selling of properties.
The movement of new technological advances in real estate allow us to pull together powerful tools for data-driven insights. Not only does it benefit our growing businesses, but also provides clientele with a more seamless experience.
Change is coming, but slowly.
When it comes to technology, commercial real estate is slower to change than most other industries. But truth be told, change is coming.
Internet sales will continue to grow. Major brick-and-mortar retailers are investing in a strong online presence that will provide significant growth opportunities. These retailers will be able to expand their market while building brand influence, changing their warehouse and distribution needs. Applications like Airbnb is changing the way we look at hotel space. With the inception of Uber, people are driving less; changing the landscape of demand for parking lots and structures. We are more connected and more mobile than ever, allowing businesses to operate anytime and anywhere in the world. The need for office spaces will also evolve as technology progresses.
Change is taking root, and picking up momentum. As noted by National Real Estate Investor, the tech sector has had a profound impact on the health of the real estate industry. Utilizing these advances will be natural for the next generation of real estate executives. The industry is starting to realize how critical technology can be at every stage of the real estate process. In order to remain competitive, it is key to take advantage of untapped potential and ride the wave of technology into the future.