U.S. needs more warehouses
KEY POINTS
As much as $70.5 billion worth of holiday purchases this year are expected to be returned, real estate firm CBRE predicts.
The surge in digital orders has created a heightened demand for warehouse space in the U.S., so that retailers and delivery providers can handle all of the packages coming in and going out.
As much as 400 million square feet of additional warehouse space could be needed in the next five years just to process returns, CBRE said.
With a record amount of returns projected to flow back to retailers this holiday season and in the coming years, the United States is going to need more warehouse space to handle them, according to a new report.
As much as $70.5 billion worth of holiday purchases this year are expected to be returned to companies by consumers, commercial real estate services firm CBRE forecast Monday. That will put additional stress on supply chains that are already working around the clock, at max capacity, to fulfill a surge in digital orders.
CBRE said the projected 73% jump versus a five-year average is largely due to more online shopping. E-commerce sales tend to have a much higher rate of return, up to 30%, than items purchased in stores. People buying apparel online, for example, might order two or three sizes to judge which one fits best, then send the others back.
“One thing we often overlook is what happens when that shirt of yours gets returned,” Matt Walaszek, director of industrials and logistics research for CBRE, said during a call with the media Monday. “It creates a lot of challenges and costs for retailers.”
The shift in spending to the web, along with the heightened returns volume, carries big implications for the commercial real estate industry. As much as 400 million square feet of additional warehouse space could be needed over the next five years just to process returns, CBRE said, citing the need for both retailers and third-party delivery providers, such as UPS and FedEx, to have more space to store packages coming in and going out.
As e-commerce sales grow to represent a larger portion of total retail sales, CBRE predicts the U.S. will need an additional 1.5 billion square feet of industrial space within the next five years.
But, the firm cautioned, 22 of the country’s industrial markets as of the third quarter had vacancy rates below the national average, meaning more warehouse space is likely going to need to be built from the ground up.
Some have suggested developers take empty retail space and convert it into logistics space, but that’s not always the best route. It is fraught with hurdles, including the need to rezone the land for a new commercial use. Also, turning a shuttered mall into an e-commerce warehouse could reduce the value of the property anywhere from 60% to 90%, according to a separate Barclays report.
E-commerce sales are expected to break new records this holiday season, with the U.S. already seeing record online gains on Thanksgiving Day, Black Friday and Cyber Monday, according to data from Adobe Analytics. The coronavirus pandemic has pushed more people to avoid crowded stores and shop safely from their sofas on their smartphones.
Shipping companies are working to deal with the surge. UPS reportedly told its drivers on Cyber Monday to stop picking up packages at some of the largest retailers in the country after the companies hit capacity allocations set by the delivery company.
Retailers and shipping companies are also likely bracing for Jan. 2, which is expected to be the busiest day for returns.
As companies are strained for warehouse space — pushing more and more retailers to use the back of their stores to help them fulfill online orders — they’ll also face a cost burden with the record returns. CBRE said the average cost to return an item can amount to as much as 59% of the original sale price.
Bulkier items, such as furniture and exercise machines, are more expensive to return. And the longer apparel sits waiting to be returned and put back on a shelf, the more it depreciates in value.
Investors have been turning away from mall stocks such as Simon Property Group and Macerich, and favoring warehouse owners and other industrial real estate investment trusts this year, seeing this space as a growth opportunity.
Simon shares, which have a market value of $29.4 billion, have fallen nearly 40% since January, while Macerich’s stock is down nearly 55% over the same period, bringing its market cap to $1.9 billion.
Meantime, shares of the Amazon landlord Prologis are up more than 9% year to date, while shares of Duke Realty are up over 10% since January. Prologis has a market value of $72.2 billion, and Duke is valued at $14.3 billion.
