NFI Industries

The Ecommerce Effect on the Commercial Real Estate Industry

The basis of ecommerce is to get any product to any customer at anytime, anywhere. In 2014, ecommerce sales for United States retailers surpassed $300 billion for the first time reaching $304.91 billion which was a 15.40% increase in comparison to the previous year and is the fifth year in a row that web sales growth has been close to or above 15%1. Furthermore ecommerce sales are projected to reach $370 billion in sales by 20172. With companies offering same day delivery, gift wrapping, ship to store and other ecommerce advantages, consumers are opting to do more of their shopping online. As ecommerce continues to grow, industries like commercial real estate are adapting to offer more ideal solutions to support ecommerce goals. Ecommerce has shifted what companies look for in their real estate facilities and has evolved what is now expected in today’s fulfillment centers.

Sourcing Plan

One of the first steps in your ecommerce real estate strategy is to determine the objective of the facility. There are three primary fulfillment methods. One of the methods is to fulfill ecommerce orders right from the store. The next fulfillment method is that the company has one distribution center dedicated to fulfill ecommerce orders and a separate distribution center dedicated to their stores. Lastly, a company could have one distribution center that fulfills both the ecommerce orders and replenishes store inventory. Some companies may choose to have a combination of these methods.

Location

One challenge that companies must consider is the location of their distribution and fulfillment centers. Companies are now looking for fulfillment locations that will reach most of their consumers in the least amount of time due to the requirements of overnight or even same day shipments. We’ve seen an increase in the amount of retailers head toward urban hubs like New Jersey, Lehigh Valley and southern California which offer easy access to major metropolitan areas. Companies are taking advantage of the positioning close to major hubs with attractive road infrastructure and proximity to air and ocean ports and intermodal hubs. They also want to be close to these areas for optimal parcel delivery like UPS and Fedex. It’s important to have the availability to get inventory in from suppliers and manufacturers and out to customers in the most cost efficient and timely manner. Aside from inventory, location is also important when ensuring there is labor availability in the area. Ecommerce retailers experience surges throughout the year, most notably during the holiday seasons, making the availability of labor essential.

To Develop or Adapt

Many companies also deliberate whether they should invest in the development of a new building or an existing building to meet their needs. When companies choose to develop a fulfillment center, many invest in a built-to-suit facility where they can customize the building to meet their distinct needs. These built-to-suit facilities offer flex-space where companies can estimate their growth and build a facility that will support that growth in the future. Others may choose to lease a pre-existing warehouse. The type of facility you choose can depend on your business objectives . If you are looking to have an operation up and running in a short amount of time, a pre-existing facility may meet those desires. There are tradeoffs with each option so it’s important to know your business goals and how you expect to manage and grow.

Design

Ecommerce has changed the design of many fulfillment centers. Many perspective lessors are looking at cubic square feet instead of floor based square feet as they estimate space for automation. These distribution centers are now two to three levels with a 40 foot ceiling height. It’s important to look at the number of loading docks and how trucks can easily navigate in and out of the area. Pallet in, pallet out has evolved to individual pick and pack to the end consumer. This changes how the warehouse is set-up to accommodate finding the inventory, packaging products, and shipping. More challenging is that customers expect their products will get shipped and received within 24-48 hours of ordering. Companies have to ensure that facilities are equipped to meet all of their requirements and complexities like integration of conveyers and automation and the technology to support these functions. For instance, SKU inventory systems help manage inventory but what makes the process even more complex is that there are many different types of products. For example, a shirt may come in a variety of prints and sizes. Having the space to incorporate all of these intricacies and SKUs will ensure that your operation can run successfully. These are all important aspects that are taken into consideration when choosing the ideal ecommerce facility.

Companies need to compare their capital investment, term commitment and rate of change to determine their ideal ecommerce real estate strategy. What works today may not be the best solution for them in the future. As lessors and buyers change their expectations to meet their ecommerce fulfillment needs, developers and real estate companies will shift to meet these needs. We’ll begin to see higher buildings, more layout options and more popular locations than ever before.