Have you been to a grocery store in the last year and seen a store employee rushing around looking at a list and filling a basket?  That’s e-commerce in a brick-and-mortar store.  In today’s podcast, Jan & Bob discuss what is e-commerce and how’s it’s affecting commercial real estate.

First, let’s define what is e-commerce?  Most people think they know, but never really stop to define it.  It’s really nothing more than ordering something on the internet and having it delivered to your home, office or wherever.  So, take the example above, of a grocery store employee filling a basket for someone who ordered online-is that e-commerce or brick-and-mortar retail?  Actually, it’s a hybrid, right?  While the ordering was done online, the fulfillment is being done from a brick-and-mortar store and the groceries may be picked up by the customer or delivered to their house.  So which is it?  Both in my book.  It has definitely changed retail and provided another option for how to shop.

120 years ago most people grew their own food because most people didn’t live in cities.  They could buy things through catalogs which had limited delivery available.  They could order by mail or by phone if one was available.  They could go to a store the next time they were in the nearest town.  But that store had limited inventory/selection.

The industrial revolution started attracting people to cities and more people started buying from stores.  Catalogs were still available, of course.  Walmart’s big innovation was their distribution system to towns large and small with stores much larger than the average retailer with far greater selection.  That’s why they were so successful.

The digital revolution created another way to order.  Customers can still pick up the item from the brick-and-mortar store, but they can also have it delivered to their home or office.  What’s fundamentally different in that scenario from the catalog days in 1892 is the mechanism to order the products and the speed of the delivery.  And that’s been the real story of e-commerce over the last 10-15 years, especially 2020.

I used to be my wife’s best friend…..it’s now a guy named Jeff…..Bezos.  He comes to visit her weekly, if not daily.  The convenience monsters Amazon has turned us all into has been amazing.  E-commerce as a percentage of total retail sales was only 4% in 2010 and had risen to 11% in Q1, 2020 just before Covid hit.  It peaked at 16% in Q3, 2020, but has fallen back to 13% in Q1, 2021 as brick-and-mortar retail has opened back up.  All these numbers are per Statista.com.

I read an article from SIOR.com which told a story I thought was interesting.  A guy was in a grocery store and much like my earlier comment he noticed all the home-delivery workers gathering grocery orders and thought, this is what e-commerce is coming to.  He had a vision of the future with grocery stores taking over former department stores.  Everything inside will be available to order by computer.  The items will be electronically registered through automation,  placed in a delivery box, loaded onto electric vehicles, and delivered to a drop box at a home.  The billing will be electronic as well.  This guy went on with his futuristic vision thinking if a military officer sitting in at a desk in the US flying a drone somewhere else in the world can shoot missiles, his vision including electric delivery trucks is easy to believe.  Warehouses and distribution centers will be the initial point of departure for commodities that will all eventually be ordered, assembled and shipped via automation.  (I personally loved the correlation of drones in battle with e-commerce food delivery.)  I’d say that vision is already a reality.  Walmart is already converting stores to fulfillment centers.  Think about the Amazon Go stores with no cashiers.  Walk in, get what you want, walk out.  You’ll be billed.  And this was long before Covid.  With the growth of e-commerce, the most important piece is what’s called the last mile – getting products from the giant distribution warehouse to the house or office of the consumer.  The logistics of making that happen and the speed expected for delivery now is where all the action is.

There are five major distribution markets in the US – NY/NJ, Los Angeles, Chicago, Dallas and Atlanta.  Those markets are proximate to ports, major airports, intermodal sites and major highway systems.  While those places will continue to play a vital role in distribution, the last mile issue requires changes in every city in the country….and probably the world.  It will certainly require more warehouses to be built, at a minimum.  Speaking of which, I was really surprised to learn that the DFW area has been delivering between 25-30 million square feet of warehouse space, every year, for the last 10 years!

Interestingly enough also, those new buildings being built are going vertical.  The average 28′ clear height for new construction 20 years ago has grown to 40′ clear.  Tenants can stack/rack more product because there are far more cubic feet in the building, but they are still paying by the square foot.  Brilliant, right?  No doubt, but it comes with certain challenges.  The cost of a taller building is higher which means higher rents.  But the cost per cubic foot is lower so it makes sense.  The higher stacks require more stable forklifts which have been developed.  The greater inventory means more trucks on the streets and parking so they need more space outside to park them.  Some of these buildings have a 24-hour operation too so beefed up lighting must be provided.

There is a lot of technology that must be developed to allow for all of this.  E-commerce couldn’t have happened unless computers got into everyone’s home or smart phones into their hands.  Oh, and internet speeds had to be fast enough to make it worth ordering online.  In 1999, it would have been faster to go to the store to shop than wait on glacial internet of that time.

Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.