E-Commerce Still Driving Industrial Warehouse Demand

The demand for industrial warehouse space remained surprisingly strong during the pandemic. Statistics showed that shopping habits changed dramatically, especially during the shutdown, and many people shifted toward e-commerce retail for almost all of their needs. In 2020, e-commerce sales rose by $244 billion since the previous year, which was a 43 percent increase. Because of this increase, brick-and-mortar retailers joined e-commerce companies by seeking out industrial warehouse space to fulfill their online orders.  

As one would suspect, Amazon led the way in sales during the pandemic, with their May and July sales in 2020 up 60 percent compared to that same period the previous year. The e-commerce giant had always been atop the food chain amongst its peers, but the pandemic seemed to catapult them even further out ahead. As of June of 2022, Amazon enjoyed 37.8 percent of the market share and brought in more revenue than the next 13 online retailers combined.

DEMAND FOR INDUSTRIAL SPACE

While other online retailers did not get quite the boost Amazon did from the pandemic, they did see their e-commerce sales grow significantly. The increased demand for products purchased online led many retailers with brick-and-mortar locations to shift their focus to a more e-commerce approach.

This created a significant uptick in demand for industrial warehouse space for retailers looking to fulfill their online orders. From 2020 through 2021, approximately 40 percent of industrial absorption in the U.S. was made up of companies who were looking to use these facilities for e-commerce purposes.  

THE FINANCIAL APPEAL OF SHIFTING TO WAREHOUSES

What made the move of placing an increased emphasis on e-commerce sales even more appealing to big box retailers is the cost of rent for these industrial facilities compared to their already-existing brick-and-mortar locations. It is considerably cheaper to rent industrial warehouse space than it is to rent a high-traffic retail location. The national average for renting retail space is $26-per-square-foot, whereas in the industrial sector, the national average is $8-per-square-foot, and can be as low as just over $4-per-square-foot in some metro areas. Even the more saturated industrial markets, where prices can be nearly double the national average, they are still well below their respective retail markets.

AMAZON CANCELS CONSTRUCTION ON FACILITIES

The e-commerce industry has only recently begun to slow, and there has even been some cause for alarm triggered by Amazon who has been delaying or cancelling planned warehouse projects. More than 15 warehouse projects have either been delayed or cancelled since the beginning of 2022. They have even gone as far as shuttering some of their brick-and-mortar stores that just recently opened.

Even though this would appear to be a projection of the e-commerce industry as a whole, the moves do not seem to be indicative of any lack of demand for online shopping. Amazon officials have even pointed toward internal reasons for their realignment of priorities. Instead of a decrease in online retail demand, they are citing labor issues as the main reason for the scaling back on these facilities.

“We hired more people and then found ourselves overstaffed when the omicron variant subsided rather quickly, at least from our standpoint in warehouses,” Amazon CFO Brian Olsavsky said recently. “So, the issue has switched from disruption to productivity losses to overcapacity on labor.”

Labor, in general, has been an issue at Amazon as of late. A number of facilities in the U.S. and abroad have been the scenes of worker strikes, citing unsafe labor conditions and low pay. However, it is unclear how much this factored into their decision to contract their warehouse footprint.

E-COMMERCE REMAINS STRONG

A more in-depth look at the e-commerce industry supports Olsavsky’s claims that the move by Amazon was precipitated by internal reasons as opposed to what is happening in the market. Experts project 266.7 million people in the United States to shop online in 2022, which is a decent portion of the more than 2 billion people globally in the same category. In 2021, e-commerce sales reached more than $870 million and comprised 11.8% of total retail sales. In the first quarter of 2022, e-commerce sales rose by 2.4 percent, but dipped slightly in terms of total retail sales.

INDUSTRIAL SECTOR REMAINS STRONG

Despite inflation, the demand for the industrial sector has passed its pandemic peak, but still exists, and in areas where vacancy rates are down, warehouse space is even more coveted. A once-flourishing area like the Inland Empire in California is down to a 0.6 percent vacancy rate with industrial leasing rates on the rise there. Keeping up with demand, which is partly due to the continued upward mobility of e-commerce, is even more difficult in places like this.

While this issue is more pronounced in land-constrained markets, like the Inland Empire, the supply side of the industrial sector is having trouble keeping up with the demand across the entire U.S. Experts have forecasted 2023 to be another year of growth in the nonresidential construction industry, with the industrial sector poised to lead the way.