Fulfillment and Delivery Sites Breed Warehouses as E-commerce Sales Flourish
For the last two years, a significant spike in e-commerce has affected virtually all corners of the retail industry. E-commerce sales surged to a record 15.7% of all U.S. retail receipts in 2020, and although brick-and-mortar stores are coming back stronger, retailers have continued to prioritize digital channels, social commerce, and web traffic.
Responses to this spike have varied from company to company, but the overwhelming majority of retail giants accelerated their investments in warehouses. In fact, the five biggest retailers on the S&P 500 index purchased three times the number of warehouses from 2020 to 2021 then from 2018 to 2019.
Increased demand for industrial spaces
Data from the U.S. Census Bureau also backs up this meteoric rise, as U.S. retail e-commerce sales reached roughly $210 billion during the third quarter of 2020—an increase of over 36% from the same period in 2019.
But how does this translate to more warehouses? According to CBRE Research, $1 billion in additional e-commerce sales results in 1.25 million square feet of warehouse space demand. Consequently, the net absorption of over 250 million square feet of warehouse space in 2021 exceeded the previous five-year average by almost 20%.
Walmart, for example, is one of the next-biggest warehouse buyers in the country after purchasing 11 new facilities throughout the course of the pandemic. Amazon has also expedited warehousing by acquiring more than 50 fulfillment and distribution sites across New York City during the last two years.
Walmart and Amazon aren’t the only retailers in this position, either. For the first time, demand for industrial spaces outweighed offices and apartments in 2021—and increased digital spending, stimulus checks, and varying lockdowns only swayed this further.
Finding space in New York City
In many ways, New York City is the epicenter for retail warehouse developments in the United States. Every day, about 2.4 million packages are delivered to the region. And although its citizens have moved past lockdowns, making same-day deliveries is more in demand for remote workers, stay-at-home families, and COVID-compromised individuals.
In Queens, Brooklyn, and the Bronx, an additional 14 warehouses and multistory centers controlled by logistics companies including UPS, FedEx, and DHL were built during the last couple of years to help facilitate e-commerce growth.
And neighborhoods like Red Hook in Brooklyn have already transformed into bustling logistics hubs that include both new warehouses and converted buildings that were bought up by Amazon or another e-commerce giant.
In fact, just 1.6% of all New York City warehouses and 1.3% of all Jew jersey warehouses are available for lease—even as developers pour billions of dollars into the construction of new facilities.
In Red Hook, a neighborhood just under one square mile and bounded by water on three sides, at least three new warehouses have begun operations and there’s potential for more. Made up of narrow roads and mostly low-rise buildings, one of the neighborhood’s new Amazon facility led to more congestion and fewer parking spots.
“The whole neighborhood is up in arms,” said Jim Tampakis, a small retailer owner in the neighborhood.
By the end of 2022, Amazon has plans to move into two more warehouses in Red Hook, including a large three-story facility on the waterfront. And although just four multistory warehouses are currently under construction across the city, three of them will be owned by Amazon.
Is there room for small retailers?
For smaller retailers who want to be in control of their own fulfillment and delivery sites, the rising cost of lease warehouses can make it almost impossible to compete with retail and logistics giants.
“I’ve been doing this for 30-some-odd years, and I’ve never seen it like this,” said Rob Kossar, a vice chairman at JLL, a commercial real estate group. “In order for tenants to secure space, they are having to negotiate leases with multiple landlords on spaces that aren’t even available. It’s insane what they are having to do.”
There are, however, success stories from small business owners who’ve fought tooth and nail for their own space.
“…There’s no doubt that the demand for industrial space is at an all-time high,” said Patrick Rafferty, vice president of product and engineering at Reonomy. “Consequently, there are more buyers entering the market to purchase industrial properties.”
On the Brooklyn waterfront, Arnaud Plas successfully took greater control over his online beauty company’s supply chain. Just before the pandemic, Plas moved his business into its first manufacturing hub—a property in Sunset Park shared with Amazon.
“At the beginning, it was sort of like a bet because that decision was made in 2018, long before the supply chain issues,” Plas told The New York Times. “I would say it has been a great decision.”
An imperfect future
Going forward, the price of warehouses will only rise as facilities become less available in city centers. Metropolitan areas including New York, Los Angeles, and Chicago are already incredibly congested, so looking across state or county lines is in the playbook for e-commerce giants like Amazon.
Late last year, residents of Pilesgrove, New Jersey protested construction plans for a 1.6 million square-foot warehouse on former farmland—a plot larger than Ellis Island. And halfway across the globe in Cape Town, South Africa, the national court has halted construction of Amazon’s new Africa headquarters after determining the proposed land was sacred.
No doubt Amazon and its competitors have enormous control over developing fulfillment and delivery plants, and solutions must be put in place so that homes and sacred lands aren’t destroyed.
Reusing vacant retail buildings as industrial spaces is happening in New York City and is a good sign for a growing industry, but there certainly aren’t enough cases of this to assume we’re headed in the right direction across the country.