You can only ignore a 500-lb. gorilla so long before you find yourself on your back looking up at your furry companion. The growth of e-commerce has mushroomed from scratch in 1995 to an estimated $180 billion in sales in 1999 and an estimated $1.2 trillion in 2002. Web use is doubling every 100 days, with an estimated 200 million users worldwide expected by the end of next year. The Web has been adopted at a faster pace than even television or personal computers.
The phenomenal growth of the Web is deeply influencing the industrial real estate sector and has already led to increased demand. One sign is the upsurge in executive searches for real estate and logistics professionals to meet the inventory management demands of their fast-growing e-commerce operations. Another sign are the all-points-bulletins being broadcast by scores of traditional retailers looking to hire experts in Web merchandising.
The impact of e-commerce on industrial real estate can be viewed through the evolution of three key market dynamics: The blossoming of born-on-the-Web firms, the branching out of traditional retailers into e-commerce, and the development of business-to-business e-commerce. All industrial facility types including bulk warehouses, manufacturing sites and light industrial assembly buildings will benefit from these various phases of e-commerce growth. And the phrase "strategically located" will take on new meaning in industrial real estate as the era of e-commerce comes into its own.
Born-on-the-Web companies - particularly those like Amazon.com and CDNow.com that are expanding their operations to take physical possession of goods - are already creating new demand for bulk-oriented facilities in a variety of locations.
In addition, traditional retailers trying to make up for lost time by expanding quickly into e-commerce will create increased demand for bulk distribution, manufacturing and assembly buildings. The market is waiting for bricks-and-mortar retailer Wal-Mart to unveil a newly designed and upgraded Website this fall, and others are following suit with new or revved-up sites.
As their business volume explodes, so, too, will their need for industrial facilities. Similarly, vertically integrated retail businesses that have manufacturing and assembly operations, such as Levi-Strauss and Mattel Toys, could expand current manufacturing sites to provide direct fulfillment from the factory to the customer via the Web.
But it is the third phase of e-commerce development - business-to-business - which will have the most dramatic effect on industrial real estate. "The storm that's arriving is when thousands of institutions seize the power of this global computing and communications infrastructure and use it to transform themselve," says Louis Gerstner, IBM's CEO. "In other words, the transformational potential of the Web is still in its infancy and we are only limited by our imagination."
The growth of business-to-business e-commerce will take industrial facility demand to the next level, increasing not only development activity but redevelopment as well. E-commerce business-to-business facilities require modification and/or expansion of existing facilities. To increase productivity in the manufacturing-to-fulfillment chain, these facilities will require enhanced manufacturing, fulfillment and call-center capabilities, which will in turn fuel significant development and redevelopment in industrial real estate.
The criteria for strategic location in industrial real estate will change as business-to-business e-commerce develops. In the spirit of being an e-commerce company as opposed to doing e-commerce business, companies must locate industrial facilities that mirror the Internet's aim to create operating and cost efficiencies, as well as optimize customer service capabilities. E-commerce is changing real estate's maxim from "location, location, location" to "location, price, service."
First Industrial recently helped online bookseller Amazon.com select a site that fit its criteria for an optimal location, an overall superior economic package and maximum customer service. The company selected a state-of-the-art, cross-dock facility located near a major highway in Atlanta. This strategically located facility enables Amazon.com to provide easy access for small parcel trucks delivering books and other products to its millions of customers in the Southeast, and to benefit from state and county tax advantages.
Where there are winners, there are also usually losers. The shift toward online order fulfillment clearly lessens the need for the number and size of traditional retail outlets. No product type matches industrial real estate for its low-cost attributes: All-in industrial rents average $6 per sq. ft. vs. $20 to $30 per sq. ft. for retail or office.
Which real estate companies are most likely to benefit the most from the growth of e-commerce? Those that have a pure industrial focus, a strong national presence, a diverse product portfolio and on-site management expertise are strong bets. These transformational changes are a clarion call to real estate firms: Prepare your organization to meet the evolving needs of e-commerce or miss out on the opportunity. The rules are changing, and the gorilla is ready to pounce.