by Elise Couston, Senior Managing Director at Newmark Grubb Knight Frank
A recent report by Prologis, the leading owner of industrial real estate globally, stated that the demand for industrial real estate has doubled over the last three years. It will continue to grow at a healthy clip, and 30 percent of U.S. industrial big-box demand is correlated to e-commerce.”
It was not that long ago we were debating the extent of the impact that “clicks” would have on “bricks”. There is no longer this debate, but now it is rather about the emergence and extent of the impacts. Many of the impacts are anticipated to continue changing and “morphing” over the next several years, or decade, as e-commerce is a business model that is, in its rate of growth, still in unchartered territory.
Seventeen years ago, Jeff Bezos, the founder of Amazon, said “Commerce is simple – you find it, buy it and ship it. E-commerce, however, is much more about customer behavior evolving.” Bezos actually sold, boxed and shipped the first book on Amazon.com from his Seattle garage. And, within its first 30 days of this business, the self-proclaimed “Earth’s largest bookstore” began selling books through its online portal to all 50 U.S. states and 45 countries.
Amazon.com became the standard for a customer-oriented, e-commerce website. Users could search available titles by keyword, author, subject, category, and even receive personalized recommendations based on search history. They could quickly purchase books and securely with the patented “one-click” checkout system.
The Beginning, Evolution and Growth of a Digital Economy
The initial launch of the now ubiquitous internet began in the 1970s with the” host-to-host” protocol networks. The first online business-to-business (B2B) shopping transaction was in 1979, and the first business-to-consumer (B2C) online business transactions started in 1984. That same year, CompuServe launched its popular Electronic Mall (email).
The switch from bulletin board systems to the early browsers happened in 1990, when Tim Berners-Lee, a research expert with the European Organization for Nuclear Research, proposed a hypertext-based web of information that users could navigate, using the more simplified browser-interface dubbed “a browser.”
Marc Andreesen, at the National Center for Supercomputing Applications, introduced the first widely-distributed Web browser called Mosaic. The release of Netscape 1.0 in 1994 included an important security protocol called Secure Socket Layer (SSL) that encrypted messages on both the sending and receiving side of an online transaction. SSL ensured that personal information like names, addresses and credit card numbers could be encrypted as they passed over the Internet. In the mid-1990s, the regulated third-party services for processing online credit card sales were founded, and Verisign developed digital certificates that verified the identity of online businesses. Verisign soon switched its focus to certifying that a website’s e-commerce servers were properly encrypted and secure.
From those early transactions, e-commerce has grown exponentially at a phenomenal rate. There are estimated to be approximately 185 million online shoppers in the U.S. alone, and retail e-commerce sales are projected to exceed $300 billion this year. The gains have averaged about 10 percent annually over most of the past decade, but those numbers have recently skyrocketed.
A recent Deloitte study predicts that e-commerce will account for approximately 30 percent of all U.S. retail sales by year 2030.
Customers’ expectations and demands for shopping convenience have changed based on these new experiences, and some of the new services we are taking advantage of are, as follows:
• Overnight or same-day delivery • Comparison of items from different suppliers and retailers with a click of the mouse • 24/7/365 customer service • Frequent updates on order status, and tracking and shipping status • High level of accuracy and quality of the order • Free shipping and returns
Where Do We Go from Here?
One of the newest buzzwords is “Omnichannel marketing”. This new type of Omnichannel (also spelled omni-channel) is a multi-channel approach to sales that attempts to provide the customer with a seamless shopping experience, whether the consumer is shopping online from a desktop, mobile device, by telephone, or in a “bricks and mortar” store.
Listed below are a few different types of distribution channels:
• Home Delivery – this distribution system removes the retailer and distributes goods directly from the local warehouse to the customer; • Mail Order Shopping – this alternative removes the local warehouse from the distribution channel and uses the postal service to distribute the goods from the national warehouse to the customer; • Direct Distribution – this method moves the product directly from the production company to the final customer. The order is placed on the internet, sent directly to the factory for production, and then distributed to the consumer by mail.
Bricks Support the Clicks
As noted earlier, Prologis predicts that 30 percent of U.S.’s industrial big-box” demand is directly correlated to the growth of e-commerce”. Based on changes in the supply chain network, and companies’ desire to be closer to the consumer, the location, size and function of industrial properties has also begun to change.
Some retailers are supplementing their regional distribution networks by opening new distribution centers that are purposed specifically for their e-commerce business. Many retailers have now begun to look for rail-served locations, primarily for the inbound supply of inventory. If the location is not rail-served, the user will likely identify the closest intermodal yard to get the product from there to the distribution center. And, by far, the most important element for the user is the technology that drives the efficiency and speed from the initial point of sale to the point of fulfillment.
Home Depot pioneered the new Rapid Deployment Center model in 2010, which was able to turn product around from inbound receipt to delivery to stores within 72 hours. Companies like Amazon and HP are now able to deliver directly to the consumer within 24 hours of the original order.
The new e-commerce distribution centers most often include the following elements:
• Higher ceiling heights in the warehouse, i.e. 36- to 40-foot clear, for higher racking, mezzanines, and conveyor systems • Heavy power to accommodate material handling infrastructure • A larger land site for the increased amount of employee parking • Fully-air conditioned warehouses • Fully-fenced and securitized facilities • Larger staging areas and multiple truck lanes • In-fill locations that are closer to the customer
As an alternative to in-house fulfillment, a large number of retailers have turned over their internet order processing to 3rd party logistics companies (3PLs) that are experienced and equipped to handle their online requirements. Retailers, whose online orders are continuing to grow at an accelerated rate, often prefer the flexibility of working with a 3PL that can help them continue to expand, as needed.
The integration of customer orders and parcel tracking is made possible through the 3PL’s Warehouse Management System. The WMS is a precise system for efficiently tracking all of the products. The WMS system communicates with the Enterprise Resource Planning (ERP) software, which enables the sensors in the” pick-and-pack” systems and conveying equipment to monitor individual SKUs as they are stored and moved through the facility. Distribution warehouses are continuing to become more efficient..
Building to the Future
The rapid, meteoric changes in our daily lives that are attributable to the advancement of technology have been both unprecedented and exciting. The commercial and industrial real estate industries have begun to respond to the changes required based on the new supply chain strategies, with state-of-the- art building characteristics that address the current consumer demands and expectations. We are, in effect, in the midst of the new Real Estate Age of E-commerce. It promises to be a fascinating learning process for all!
