The Amazon Effect and E-Commerce

Over the last few years Amazon has not only changed how consumers shop but has drastically changed all aspects of the real estate market. This Amazon effect and e-commerce is driving a real estate revolution and the effects have been seen here in the Northeast, Ohio real estate market. Just recently Amazon has made two major acquisitions in the Cleveland market. The first was the purchase of the former Randall Park Mall site which will be the home to a 880,000 SF fulfillment center which will create an estimated 2,000 jobs for the region. The second acquisition was the former Euclid Square Mall which will be a 650,000 SF fulfillment center that will employ around 1,000 people. Both former large retail sites now converted to industrial is a trend that real estate markets are seeing across the country. As consumers change the way they buy products, the impact is changing the supply chain, and impacting how goods are moved and stored. This in turn is changing the industrial real estate market in all aspects including the high demand for high cube warehouse space, how companies/developers build new inventory, and where investors are placing their money.

An article published by John Morris and David Gorelick of Cushman & Wakefield titled “Retail Isn’t Dead – It’s Just Getting a Makeover” summarizes that due to e-commerce retail has changed drastically in the last few years, but the bricks and mortar stores remain relevant. These stores now have become only one aspect of the overall consumer experience. Retail is now driven by instant gratification and experiential satisfaction rather than brand loyalty. Therefore, big box retailers must revamp their real estate strategy by investing in online fulfilment, distribution centers and technology necessary to facilitate same day and next day shipping. On the other hand, companies who started as an online presence only now must set up physical stores to fulfill the consumers’ need.  In fact, 59% of millennial shoppers said a physical store nearby is important to them when buying products online. There is a balance that retailers and e-commerce companies must strike between physical stores and digital platforms, an approach called, “newCommerce.”

As our day to day lives continue to change because of online shopping, mobile commerce, urbanization and social media, these trends have greatly influenced the industrial real estate market nationally and globally. In a recent study completed by Cushman and Wakefield, the industrial overall vacancy rate in the United States is at the lowest point in three decades, which is currently 5.2%. An estimated 22%-25% of U.S. industrial leasing is tied to e-commerce which has been the driving factor behind the industrial market. “The Globalization of E-Commerce,” an article written by John Morris, Ben Conwell, Jason Tolliver and Elisabeth Troni of Cushman and Wakefield states that e-commerce is still in its infancy, but it has already had a transformative impact on global supply chains. Analysts expect e-commerce to continue to grow 30% to 40% annually. All e-commerce business models will vary in many ways including the size of the operation, location, product focus, and retailer model. In terms of real estate requirements, look to move towards four distinct categories:

• Large fulfillment centers located outside major metropolitan areas
• Mid-sized distribution/fulfillment centers seeking to locate proximate to the population
• Medium to large sortation centers located within major urban centers to accelerate delivery and mitigate risk
• Small depots dispersed throughout the urban core serving as “last-mile terminals” to satisfy customer service expectations for instant delivery

The Amazon and e-commerce revolution may have some negative effects on the economy. In the United States this revolution has left America with far more storefronts than needed which has continued to cause the vacancy rate for retail buildings to increase. As stores continue to close both property tax and sales tax receipts will decline, putting a greater burden on homeowners and other businesses to pay for schools and infrastructure. Lastly, as stores close, this will cause an estimated loss of nearly 2 million jobs over the next five years in the retail sector. The Amazon and e-commerce revolution will continue to flourish in the future significantly changing the real estate market and the lives of people globally. The real estate market must continue to adapt to these changes in order to take advantage of this market shift.