

The rise of e-commerce dominates retail headlines—however, what is its impact on logistics real estate? Where are we in the growth cycle? What is the impact on actual leases and developments? How do new e-fulfilment requirements change the shape and functionality of buildings? To address these questions, we analyzed the industry’s growth, examined fulfilment strategies and studied e-commerce customers’ latest leasing trends. The most notable themes include the following:
What it means for investors: Industry demand will benefit as e-fulfilment expands. The recovery of occupancies and market rents occurred faster and in greater magnitude as a result. Looking forward, it’s critical to recognize that e-fulfilment models remain fluid and continue to evolve. A more durable strategy seems likely to be the recent trend of favoring locations within and adjacent to major population centers.
What it means for customers: Growing e-commerce demand leads to increased competition for availabilities. Market vacancy rates have fallen to record-low levels in many markets. Forward-thinking businesses with thorough advance planning processes and the ability to act nimbly stand the best chance of meeting their real estate requirements at the best price and location.
This paper is organized into three main sections: (1) a discussion of industry growth around the world; (2) key findings from the latest trends of e-fulfilment; and (3) three themes poised to shape the next several years of e-commerce and logistics real estate.
An explosion of online sales. Global online sales are poised to top $2.0 trillion in 2016, yet they account for just 8.6% of all retail sales. Even with such a small share, the industry seems to have achieved a critical mass. Global online sales were less than $1.0 trillion as recently as 2011, and they appear poised to surpass four times that level by the end of the decade, according to estimates from e-Marketer and Prologis Research. Market share is rising in lockstep; online sales will have risen from less than 5% in 2011 to a market share approaching 15% by the end of the decade. There are multiple catalysts for growth, including the emergence of Asia, cross border e-commerce, demographics (the growing spending power of millennials and their preference for online) and virtual reality (its ability to disrupt categories that once seemed impervious to competition from online).
Logistics real estate is benefitting as e-commerce expands. Today, e-commerce represents approximately 20% of all new leasing, up from less than 5% five years ago. Growth is surfacing in multiple categories, from large dedicated facilities to smaller infill facilities and everything in between. In addition, logistics operations that serve both store distribution and e-fulfilment have become more visible as industry participants leverage their existing supply chain investments. These types of multi-use scenarios regularly transition toward dedicated e-fulfilment requirements as the requirement grows.
Prologis Research conducted a deep-dive review of supply chains. We first compared supply chain productivity between online fulfilment and brick-and-mortar distribution in 2014. Since then, data surrounding supply chains for e-fulfilment have only gotten better, both from financial filings and other industry sources. We assembled data covering more than 50 retailers, predominantly U.S.-based and amounting to more than $1.5 trillion in sales. Retailer categories included big-box, department stores, discounters and specialized retailers, and, of course, online only. The collective supply chain for these retailers is more than 800 MSF and 1,750 buildings.
Online retailers need three times the logistics real estate. Similar to traditional retail productivity metrics, we measured the productivity of supply chains by revenue per square foot. E-fulfilment supply chains support annual online sales of approximately $750-$1,000 per foot of logistics real estate, or about 1.2 MSF per billion dollars of sales. By comparison, supply chains that serve traditional brick-and-mortar retailers support annual in-store sales of $2,231 per foot of logistics real estate, or about 450,000 SF per billion dollars of sales. However, there is a wide range based on product type, variety, store format and other factors. These results indicate that e-fulfilment is a very logistics real estate intensive activity. Said differently, online retailers need three times the distribution center space compared to brick-and-mortar retailers for a given level of revenue.
Several factors drive intensity of use. The most important factor relates to how space is used. E-fulfilment is an intense use of logistics real estate. Unique factors drive this intensity:
In less than a decade, e-commerce sales have risen to a considerable segment of GDP. In four years the share of e-commerce (B2C, goods only) in global GDP doubled to 1.3% in 2015 and is expected to grow to 3.2% by 2019. E-commerce adoption varies by market. Notably, the UK has remained and will continue as a key leading market with a forecasted share of almost 6% in five years. The strong forecasted e-commerce growth in China, reflected also in economic and consumption growth, will give it the second-highest share by 2019.
Pronounced activity exists around the world. There is no common global standard for e-fulfilment. The differences that drive divergent models are many, such as city size, geography and labor costs. The global leaders in online fulfilment include Tokyo, London, Shanghai and, to a lesser extent, New York. Population density clearly matters, but so too does the dispersion of consumers— Japan and the UK are islands, and inter-provincial distribution is rare in China. Proximity to population centers and supply chains in these regions do not need to change. In the case of Japan and the UK, inbound supply chains to the end consumer historically were already well in-place. By contrast, online retail fulfilment in the U.S. and on the continent in Europe must contend with an evolution in location strategies—e-retailers need to balance service levels, transportation costs and network diffusion. In the past, some retailers favored centralized and lower-cost locations, but that trend is reversing. (We discuss this in greater detail below.) In China and Southern Europe, rising to the next stage of e-fulfilment will require broader consumer adoption and a greater mix of namely international retailers. In Mexico, Central & Eastern Europe and Brazil, e-commerce has achieved only some critical mass, and in markets like the Czech Republic, the focus continues to be on centralized locations.
E-commerce demand is high growth, but the specifics of customer needs can be broad. The most observable portion of the business has been major build-to-suit projects that have been routinely announced in recent years but which represent only a part of the business. The full e-fulfilment picture is much more diverse.
The Prologis portfolio reflects the broad spectrum of requirements. Prologis globally has more than 400 e-commerce customers leasing more than 50 MSF. An examination of our own portfolio, in addition to our work with customers and contacts across the industry, yields several insights about the requirements of e-commerce customers:
Five distinct customer profiles drive e-commerce growth and diversity. Putting it all together, there are more e-fulfilment use profiles than appear at first blush. In turn, these profiles create the vast diversity in customer requirements now shaping the market (and the vast diversity we likely will continue to see).
The expansion of small and medium sized retailers has become more visible. These may be 100% online retailers or existing brick-and-mortar retailers. The growth in their supply chains is consistent with the estimate that retailers need one logistics square foot for each $500- $1,000 of online revenue, or about three times the square footage of traditional supply chains. The supply chains of growing retailers tend to follow a natural evolution:
Prologis Research anticipates an increased emphasis on locations within and adjacent to major population centers. Proximity to major markets has been a trend for several years, but we expect it to expand further. E-fulfilment operations must address a complex series of questions around balancing service levels, transportation costs and inventory levels (count of facilities). The answer to this question is increasingly leading operations within and adjacent to major population centers.
Third-party logistics providers are becoming increasingly important. Outside expertise can be critical. Many of our customers operating e-fulfilment are third-party logistics providers conducting order fulfilment on behalf of retailers. This is especially the case for our mid-sized and smaller size categories. E-fulfilment is a complex operation. For online retailers, this outside expertise can be a crucial value-add at a time when topline growth might be scaling quickly.
Expansion of omnichannel experimentation. For many brick-and-mortar retailers, having a store fleet offers the potential competitive advantage of allowing consumers to obtain their goods exactly when they want them and initiate returns. Consequently, omnichannel is an area of considerable investment among retailers with initiatives such as “click and collect” and “ship from store.” Important challenges have yet to be overcome, ranging from store configurations to employee roles/responsibilities/capabilities, order mixing and unit economics. Incomplete inventory tracking adds complexity to the management of in-store stock. Consumers have favored the convenience of home delivery rather than traveling to a store. A successful omnichannel implementation asks a lot of a retailer’s supply chain.
E-commerce is becoming an increasingly important demand driver for logistics real estate globally. The recovery of occupancies and market rents has occurred faster and in greater magnitude due in part to the scope of e-commerce demand. Today’s wider breadth of demand among e-fulfilment operations, particularly for mid-sized and smaller requirements, puts them in greater competition with a broader swath of the marketplace for availabilities. Forward-thinking operations with a thorough planning process and the ability to act quickly stand the best chance of meeting their real estate requirements at the best price.
However, several trends seem likely to shape the next several years; these trends include the following:
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This report is based, in part, on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. No representation is given with respect to the accuracy or completeness of the information herein. Opinions expressed are our current opinions as of the date appearing on this report only. Prologis disclaims any and all liability relating to this report, including, without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, this report.
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Prologis’ research department studies fundamental and investment trends and Prologis’ customers’ needs to assist in identifying opportunities and avoiding risk across four continents. The team contributes to investment decisions and long-term strategic initiatives, in addition to publishing white papers and other research reports. Prologis publishes research on the market dynamics impacting Prologis’ customers’ businesses, including global supply chain issues and developments in the logistics and real estate industries. Prologis’ dedicated research team works collaboratively with all company departments to help guide Prologis’ market entry, expansion, acquisition and development strategies.
Prologis, Inc. is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. As of June 30, 2016, the company owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 666 million square feet (61.9 million square meters) in 20 countries. Prologis leases modern distribution facilities to a diverse base of approximately 5,200 customers across two major categories: business-to-business and retail/online fulfillment.
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