By Meghan Hall
The current stay-at-home environment has been a boon for industrial and logistics real estate, driving demand for such asset classes as e-commerce thrives and online sales continue to increase. Over the holidays, online transactions were expected to increase by 40 percent this year to $234.9 billion. That rapid increase in volume is going to be a huge test for industrial and logistics real estate as tenants try to balance consumer expectations with management of a stressed supply chain, especially one that must increasingly consider reverse logistics.
The latest research released by CBRE this past month indicates that by the end of the holiday season, e-commerce’s share of total retail sales could come in at about 32 percent—kicking off several major trends in logistic and industrial real estate. The biggest trend, according to CBRE, will be the importance of reverse logistics and the creation of the “hybrid store” to accommodate supply chains.
“Online returns continue to be a challenge and this year reverse logistics operations could be stressed like never before,” said John Morris, Industrial & Logistics and Retail Leader for CBRE in a statement. “With fewer in-store sales this holiday season, retailers will have to shift much of their focus to returns processing and their distribution networks in order to recoup as much value as possible.”
Up to $70.5 billion in holiday purchases are expected to be returned, meaning that a large volume of product will be pushed back into the supply chain and put additional pressure on distribution networks. Returns also add to the number of costs retailers face. For the average return, reverse logistics cost about 59 percent of the original sales price of an item. While brick and mortar retailers typically have return rates between eight and 10 percent, e-commerce sales have higher rates of return, often up to 30 percent.
“Reverse logistics demand helps the broader industrial market, but the lion’s share of actual reverse logistics facilities generally go where rents are lowest as those facilities generate expenses, not profits, for corporate occupiers,” explained CBRE’s Senior Vice President of Industrial and Logistics, Kevin Hatcher. “They are a necessary component of any e-commerce supply chain, but generally speaking they aren’t considered mission-critical. Extremely high occupancy costs in the Bay Area mandate that only mission-critical facilities, true “last mile” facilities, are located here. So, the long and the short of it is lower-cost markets will see more direct impact from this additional demand than we do locally in the Bay Area.”
Reverse logistics supply chains often require up to 20 percent more space and labor capacity than forward logistics, and the type of real estate required will depend on the types of products returned from consumers. In these scenarios, retailers often prefer second generation and Class B assets as opposed to high-end, Class A facilities.
Additionally, reverse logistics is contributing to larger requirements for warehousing. During the third quarter of 2020, the average size of warehouse leases larger than 100,000 square feet came in at 272,000 square feet.
Reverse logistics is also creating several opportunities for industrial and logistics real estate, especially for third-party (3PLs) operators. In the first three quarters of 2020, 3PLs accounted for 27.1 percent of industrial leasing volumes for deals of 100,000 square feet or more. 3PLS such as NFI Industries, XPO Logistics and Geodis can be an increasingly viable option for retailers with thinner supply chain networks.
Over the next five years, CBRE predicts that reverse logistics will move to slowly occupy space as Class A warehouse facilities fill traditional retail requirements. As much as 400 million square feet of industrial could be used to process returns in the coming years.
The need for new space, as well as the heightened cost of returns for retailers, means that businesses will need to be creative with the strategies they employ in order to minimize losses. The cost of customer care, processing and liquidation loss can amount to more than half of the sales price of a $50 item. Increased investment in technology and the creation of hybrid store models that handle multiple forms of fulfillment and inventory control will be key.
“Retailers will have to meet this growing challenge in many ways,” said Morris. “More space will be required for distribution networks. However, cutting down on the overall return rate should be a paramount goal going forward. Technologies such as virtual sizing and augmented reality can help provide more accurate product assessments, allowing consumers to make more informed decisions and reduce returns. Innovations like this will help retailers limit their losses and cut product waste – a win-win for everyone.”