It’s no great secret that e-commerce has greatly impacted the retail market. Based on 2017 figures, Amazon now accounts for four percent of all U.S. retail sales and 44 percent of all U.S. e-commerce sales. In August, Walmart announced Q2 financial results and reported 40 percent growth in e-commerce sales.
Walmart is not an outlier. Nordstrom’s reported e-commerce growth of 23 percent during the second quarter and online sales now represent 34 percent of total sales, compared to 29 percent last year. Target reported that their e-commerce sales increased more than 40 percent during the quarter.
Crucial in this expansion, supply chains have evolved to meet this demand as retailers and distributors have become obsessed with what’s called “the last mile.” This is the trip from the industrial warehouse shelf to the customer—the point at which the package arrives to the customer. As a large part of customer satisfaction, it is the most costly and time-consuming component to the shipping process.
The increased importance of the last mile has created a massive demand for industrial sites. More and more products are not being sent from the manufacturer to a retail location—they are going straight to the user. And this evolution is contemporizing industrial, making it behave more and more like retail, given its direct contact with the consumer. More and more the supply chain is merging industrial and retail functions. For example, Amazon now stores orders for customers in lockers at many Whole Foods locations.
The winner in all of this is the industrial property investor. One survey reported more than 175 million square feet of new deliveries hit the industrial sector in 2017, and according to another survey, a majority believe that the industrial expansion cycle will last more than a year—43 percent say it will last 12 to 24 months, and another 23 percent think it will last longer than two years.
There has never been a greater demand for industrial net lease. Historically, there was a much larger delta between retail and industrial cap rates, but industrial cap rates are as strong, if not stronger, than retail. Plus, industrial tenant improvement costs are much lower.
In the past, investors wanted to walk on a property and a gut-level familiarity with the products and process onsite, like McDonald’s, making retail the most popular investment type in net lease real estate. However, as single tenant use has become more popular throughout the supply chain, investors are evolving their mindset and industrial is taking the lead.
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