How the e-commerce boom during COVID-19 is changing industrial real estate

During the coronavirus pandemic, people are buying essentials online more than ever — forcing producers of staple goods to scramble for additional warehouse capacity and companies to rethink supply chains.

Online sales increased by 40% between May 26 and June 1, when compared with the period between February 24 and March 1, according to Signifyd Inc.

This shift has increased both short- and long-term demand for the industrial real estate properties that allow companies to deliver orders faster by being closer to their customer base, says Rich Thompson, International Director, Supply Chain & Logistics Solutions, JLL, who is based in Chicago.

“The exponential growth of e-commerce has driven demand for industrial real estate for the last 10 years, and the sudden spike in online activity since the crisis has accelerated that demand,” he says.

U.S. industrial leasing during the first quarter of 2020 was recorded at a three-year high – and that’s only accounting for the beginning of the pandemic. E-commerce as a percentage of overall industrial leasing is increasing too. It represented 11.8% last year, while preliminary data for 2020 shows that figure nearly doubling at 20.8%, according to JLL research.

“The sudden increase of e-commerce adoption, particularly for food, fast-moving consumer goods, health and pharmaceutical products, is happening globally,” says Craig Meyer, President of Industrial Brokerage, JLL, who is based in Los Angeles. “This is causing a strong take-up of short-term overflow warehousing and lease consolidation in the U.S. as well as in the Asia-Pacific region and in Europe.”

Supply chain spotlight

The surges in demand for online goods during the pandemic highlights the need to rethink aspects of supply chain management, Meyer says. Retailers may seek to bolster inventories of higher-demand products from now on.

“Building up the ‘buffer stock’ to quickly meet demand surges increases the need for industrial space,” he says. “In order to have timely delivery, e-commerce companies have to hold more inventory in locations closer to customers. This trend will also serve when volatility and risk likely increase due to climate change.”

To mitigate the risk of disruption, many occupiers will seek to rely less on any one country or company as a supply source, says Walter Kemmsies, Economist and Chief Strategist for JLL’s U.S. Ports, Airports & Global Infrastructure Group.

“Occupiers can regionalize their supply chains to be closer to the customer,” he says.

Investing in distribution centers closer to parcel hubs and implementing port diversification strategies are ways to help ensure that there is minimal disruption the next time a major global catastrophe happens, Kemmsies says.

Increasing transportation options, including inter-modal rail, so that that there is less reliance on trucks, and more automated facilities, also can reduce impact during major events.

Development pipeline

The increase in online grocery orders is expected to continue, and growth in the U.S. cold storage space will be necessary to facilitate it, says Julia Silva, Managing Director, JLL, Capital Markets, who is based in Florida.

With both cold storage and fulfillment centers, the complexities of direct-to-consumer facilities require either new construction or renovations, Silva says.

“We are seeing inquiries from traditional and even non-traditional developers who want to focus on industrial,” she says. “If they are going to put their money somewhere right now, industrial is a good bet.”