E-commerce continues to fuel the market as consumers continue to shop online. With businesses still reliant on both online and in-person shopping to attract and retain customers as they settle into a post-pandemic groove, one big issue remains…
As companies focus in on getting as close to the end consumer as possible, there’s an increased demand from e-commerce and last-mile tenants that wish to capitalize on population density. It’s increasingly difficult, though, to find product — especially that of Class A.
There’s been about 700,000 square feet of new construction absorbed in the last five to six years, per year. But to put it into perspective? There’s only about 300,000 square feet scheduled to be delivered by January of 2023, Goldwasser said. And it will be about 12 months after that — possibly even longer — before any new construction is delivered.
“We’re going from 700,000 square feet of space getting absorbed every year to not even being able to provide 300,000 square feet of space for the next couple of years,” Goldwasser said. “Because of the struggle to find new product, e-commerce occupiers are starting to retrofit older product to fit their needs.”
Location is the focus. Even though opportunity exists outside the metro (though, likely not much) users would rather settle for well-located, but less efficient product than move further from the end consumer. This is driving the lease rates of those buildings, some of which CBRE said have doubled within the last 12 months. New construction rates have also increased by 50–100% year-over-year.
But besides the lack of ideal space, there are a few other, smaller challenges companies are having to adjust for in our post-pandemic world.
There are several municipalities that are opposed to having last-mile tenants move into buildings in the neighborhood due to concerns regarding an increase in traffic and pollution.
“Projects are under a lot more scrutiny,” Goldwasser said, “which can add nine to twelve months to the process before a company is able to move in. We’re also still experiencing a delay in construction supply and an increase in construction costs, as well, that occupiers have to pay — and wait — for.”
Coupled with the delay in construction supply and an increase in construction costs, as well as the labor shortage every sector is facing, the outlook is pretty overwhelming. And difficult to determine. The good news?
It was once believed that online shopping would give way to the fall of brick-and-mortar retail, but current research is proving just the opposite. In fact, CBRE suggested that brick-and-mortar retail is giving a boost to e-commerce.
“Brick-and-mortar retail is more of a catalyst for e-commerce, if anything,” Goldwasser said. “At the end of the day, people are still going home to place the order online.”
Completing an e-commerce sale, in some cases, is getting a customer into the physical store. Some brands have a small retail footprint to allow for people to come in and test out their products, while others have a warehouse facility nearby so the customer can pick up the product immediately after purchase.
Call it a marketing tactic, but the sale is being made. More and more retail-type users are, in fact, interested in buildings to mimic that structure of a small retail store, along with an infill site for fulfillment.
More good news is that e-commerce clients believe e-commerce is positioned to remain strong, despite economic challenges, even if faced with another catastrophe like COVID-19. Construction activity continued to increase in at 38.2 million square feet in Q2 2022, consisting of 108 tracked projects underway. Among these developments 72% are being built on a speculative basis, while 28% are being constructed as build-to-suit projects.
“There’s a hardiness to e-commerce, and there will continue to be a demand for it,” Goldwasser concluded. “Businesses right now are just trying to keep up with customer demand.”