The Manhattan skyline looms over the horizon on the northern stretch of the New Jersey Turnpike, which wends from the Philadelphia suburbs towards New York. But the glamorous skyscrapers across the Hudson River are no longer what most excites property investors. Instead, some are betting on a clump of nondescript, low-rise structures around the highway’s midpoint: warehouses that serve as “fulfilment centers,” dispatching orders for the surging online-retail business.
The advent of e-commerce — which now accounts for 6.2% of all sales in America — has shaken up the commercial-property business almost as much as it has retailing. Real-estate funds have long relied on shopping centers, and rents at well-located malls with entertainment amenities have proved resilient. But second-tier facilities are floundering, as their tenants lose market share to online rivals with wider selections and lower prices. Even at successful bricks-and-mortar retailers, goods that once sat in the back of centrally located shops are now held in suburban warehouses, as those firms expand their home delivery and click-and-collect offerings.
Such modern structures usually lie within 100 kilometers (60 miles) of a big city and are near sea and airports, highways and sorting hubs for couriers like FedEx and UPS. They are much bigger than older types of warehouse: often more than 100,000 square meters (1.1 million square feet); and they have high ceilings to further increase their volume. At Dotcom Distribution’s cavernous New Jersey warehouse, pickers ride “reach trucks” up to three stories above ground to fetch 50,000 different products for 15 e-commerce clients. Such fulfillment centers also employ far more people than older warehouses: around Christmas each may have up to 3,000 staff working on shifts.
These buildings have been rising at a staggering pace. Jones Lang LaSalle, a property-services firm, says that since 2012 the amount of industrial space (of which 75% is warehousing) used in America has grown at an annual rate of 14.5 million square meters — double the pace in 2008, the year the property market went south. In contrast, during the same period retail usage has risen by just 6 million square meters a year, half the 2008 rate. E-commerce accounts for a hefty chunk of this growth: at Prologis, the world’s biggest industrial-property owner, 30% of projects built for specific tenants are tied to online sales.
All this construction could conceivably drive down prices. But for now, there is no sign of a glut. American industrial rents rose by 3.4% last year, bringing them within 6% of their 2008 level. Retail rents are still 12% off their peak.
The pattern in less mature e-commerce markets is similar. In Europe, industrial rents have barely begun to recover from the crash. But because the euro crisis crimped credit markets, yields are more attractive than in other rich regions, and cash is now pouring in. Foreign buyers have been particularly active: in 2012 Blackstone, a New York-based private-equity fund, set up a firm called Logicor to buy industrial assets in Europe. In just two years it has acquired 60 million square meters, making it the continent’s second-biggest player. Goodman, an Australian property firm, has also been active, building all eight of Amazon’s giant warehouses in Germany.
Lagging in logistics
Much of this investment will simply remedy a long-standing shortage: Europe has around a fifth as much modern logistics space per person as America. But even in a stagnant economy, e-commerce is creating new demand. Internet sales in Europe are expected to grow by half by 2019, which should entail about 5 million square meters of new warehousing.
That forecast could prove conservative if continental Europeans follow the lead of the British and start buying their groceries digitally. Around 4% of food in Britain is now sold online, far above the average in both America and the EU. Tesco, Europe’s third-biggest online retailer, has already opened six “dark stores” around London, just to handle home-delivery orders.
Even in comparison with such prospects, the most alluring opportunities lie in developing countries — above all in China, now the world’s biggest e-commerce market. As internet penetration and the middle class grow, online sales are rising rapidly. Until recently, leading foreign brands had not opened shops outside the country’s richest cities. They are now rushing into the interior, but may have arrived too late to win over consumers who are used to ordering online. China’s first generation of retail websites mainly let individuals sell goods to each other. Now that businesses are also selling to consumers online, demand for logistics space is growing even faster than the overall market.
China’s local governments, which control land use, were once reluctant to authorize new warehouses, because they generate little tax revenue. But they are realising that e-commerce warehouses create lots of jobs, and are now readier to give them planning permission. GLP, a spin-off from Prologis that dominates China’s industrial-property market, reports that firms linked to e-commerce occupy a quarter of its holdings there, up from just 4% in 2010.
The other big emerging markets offer healthy growth prospects too, but are a few years behind China. In Brazil, weak infrastructure and cumbersome planning rules have inhibited the growth of warehousing. Things are much the same in Russia, where online sales are just 2% of the retail market, and India, where they are below 1%. However, the new Indian government’s proposed sales-tax reform would facilitate national distribution networks and could produce a new wave of construction. This week Amazon announced it would spend $2 billion opening five big new warehouses in India. The property business is famously local, but one trend now looks universal: the blandest buildings offer the most exciting returns.
© The Economist Newspaper Limited, London (August 2, 2014)
Photo: Wikimedia Commons, user Axisadman, CC BY-SA 3.0