By John Obeid
Recent commercial real estate headlines have been peppering readers with the notion that retailers– particularly clothing retailers–are folding quickly and indoor malls have become remnants of the past. Most commentators link e-commerce companies such as Amazon to the demise of the brick-and-mortar retail industry.
This is a bit of a misleading statement. When analyzing its commercial real estate impact, there is more to it than that. While it may be one of a few factors contributing to the hardship on physical retail, it’s also propping up other segments of the industry. Across the country, the industrial real estate market has been posting record occupancy and rent growth since 2013, due in large part to the rise of e-commerce.
Growth in online sales has been a boon to industries like third party logistic (3PLs) and shipping companies, who store and distribute goods on behalf of sites like Amazon and other direct-to-consumer sites. It’s also directly impacts growth in manufacturing. Companies import goods from overseas store, pack and assemble them in warehouses, before shipping them to consumers.
Truth Behind the “Retail Apocalypse”?
Another misleading statement is that e-commerce is solely responsible for the growing bankruptcies in retail chains.
Yes, despite the recent economic recovery, malls and other brick and mortar retailers continue to shutter stores. So far this year, 11 retail chains have filed for Chapter 11 bankruptcy protection through April 2019, on pace to surpass the 17 in 2018 and 21 in 2017.
While it’s true that online shopping habits and websites like Amazon and E-Bay are hurting many retailers, it is certainly not the only factor that has pushed a number major of retailers into bankruptcy this year.
For nearly two decades, the country was in a deflationary environment where goods were cheaper to produce and sell to consumers. That was protected by record low interest rates, allowing many retailers to expand store counts quickly. Now that the deflationary period has ended, there is more pressure on margins for some retailers, which caused their cost of operations to abruptly increase.
As this dynamic continues, coupled with online sales eating into retailer’s revenues, we’re likely see even more bankruptcies. Online retailing has continued to capture a large amount of all retail sales, accounting for 10.2% of all sales in the first quarter of 2019. There is additional room for growth in that number as people’s buying habits have gradually shifted to online, especially the Millennial generation, who make up most of the number of online consumers.
Not only are their shopping habits different than other generations, they are becoming a larger portion of consumer spending. Chain retailers are facing a Darwinian effect, as those who haven’t been quick enough to adapt to change have failed.
Going forward retailers like Home Depot, Best Buy and Walmart that tie their online websites to their brick and mortar stores will flourish. Not only do they offer the convenience of online shopping but also the customer service of a local shop.
The Amazon Effect
The growth of e-commerce has also caused paradigm shift where the typical distribution center has morphed into fulfillment centers. Whereas a distribution center simply moves a product from a warehouse to a store, fulfillment centers receive, pack and ship orders directly to the consumer. This “Amazon Effect” is changing the way retailers think about their real estate as they shrink their retail stores while growing their industrial their footprint.
Amazon opened their first New Jersey fulfillment center in in 2013 when they leased 1,039,500 SF in Robbinsville. Since then, the company has grown to occupy over 11 million square feet (MSF) in New Jersey and Staten Island, making them the largest industrial occupier in the market.
Amazon’s growing occupancy also led to growth in other industries as well. E-commerce’s users leased just 573,000 SF in 2011 and 2012 combined, according to Colliers research. However, it spiked drastically in 2013, with 2.2 MSF leased by these users and averaging 3.0 MSF of activity between 2014-2018.
Distribution and logistics companies, which includes 3PLs, have experienced the greatest bump as e-commerce continues to grow. After averaging 5.0 MSF of leasing activity between 2011 and 2013, this sector averaged 9.3 MSF of activity between 2014 and 2018.
E-commerce companies such as Amazon, Blue Apron and Wayfair rely heavily on shipping companies to deliver products to consumers. As a result, FedEx and UPS have increased their occupancy over the last three years. Between 2015 and 2017, FedEx and UPS leased a total of 3.2 MSF of space in Northern and Central New Jersey. Traditional retailers such as Best Buy, Home Depot, Crate & Barrel, and Ikea have also increased their occupancy as they expand their online presence.
Consumer Demand Reshaping Last-Mile Delivery
While consumers have been buying goods online for several years now, e-commerce still has a long way to go in terms delivering goods to consumers accurately and promptly. The race for same-day delivery by e-commerce giants such as Amazon, and more recently Walmart with its acquisition of Jet.com, has reshaped the way occupiers are looking at their logistics operations.
The last-mile delivery has become increasingly important, as it makes up nearly 50% of the total cost of delivery – making it an important step for companies seeking a competitive advantage.
Industrial hubs that provide access to a day’s drive to a bulk of the U.S. population, such has Chicago, Greater Los Angeles (GLA), Atlanta and New Jersey, have seen record occupancy growth. The industrial availability rate peaked in 3Q 2010, ranging between 15%-20%, and since then record leasing activity has pulled the rate to all-time lows with each market now pegged below 5.0%, led by GLA and New Jersey at 3.9% and 4.9% respectively.
New Jersey’s strategic location, gives companies access to one of the most concentrated and affluent consumer markets in the world, reaching approximately 40% of the country’s population within a day. A business located in central New Jersey can serve more than 22 million consumers, who collectively have nearly $800 billion in disposable income and live within a two-hour drive.
Furthermore, The Port of New York and New Jersey has the largest 250-mile radius population of any port in North America, with 61 million people. In Northern New Jersey, port-related users and e-commerce companies looking for same-day delivery to the New York City area have helped keep availability rates at historical lows.
As the e-commerce industry to grows, occupiers will continue to demand warehouse space in the last mile of their distribution chain. This rapid growth has fueled net absorption and continues to create demand for new construction.
These users require modern features, such as 36-foot plus ceiling heights, ESFR sprinkler systems and adequate parking for both employees and trailers. Demand will be focused on class A product along New Jersey’s core industrial submarkets that provide immediate Turnpike access and proximity to the consumer base. However, secondary markets such has Somerset County and Piscataway will benefit from a spillover effect.
As online retailers continue to focus on one-day and same day delivery, the New Jersey industrial market is poised to remain one of the healthiest markets in the nation.
John Obeid is a Senior Director of Colliers Suburban Tri-State Research Team. He can be reached at (973) 299-3032
 McKinsey&Company Parcel delivery: The future of the last mile September 2016.