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Prologis: Leasing Demand From E-Commerce Sector Doubled in Last Three Years

07/16/2014 | By Sarah Borchersen-Keto

Prologis: Leasing Demand From E-Commerce Sector Doubled in Last Three Years

Global leasing demand  from the e-commerce sector has doubled during the last three years, and the strong growth trend is expected to continue, according to a new report from industrial REIT Prologis, Inc. (NYSE: PLD).

“Online fulfillment is in its infancy, and we anticipate e-commerce will create significant new demand for logistics real estate well into the future,” said Chris Caton, vice president and head of Prologis’ research arm.

The report notes that e-commerce sales are growing at a rate of 20 percent annually and are expected to reach $750 billion globally this year. Logistics facilities are increasingly viewed as “revenue drivers,” according to Prologis.

“Consumer behavior is evolving faster than supply chains can adapt. As such, we see retailers and distributors experimenting with order fulfillment models,” the report said. It added that “such rapid growth and quickly changing requirements make for a difficult decision-making environment for those organizing supply chains.”

According to the report, as online retailers reach sufficient size and scale, fulfillment models will emphasize proximity to major population centers, allowing for faster delivery times, higher service levels and greater flexibility in the supply chain.

They will also need more space as traditional retail activities are consolidated into logistics facilities, the report noted. E-commerce customers require three times the logistics space, or more, compared to their brick-and-mortar counterparts, said Prologis, noting that online retailers have significantly greater product variety on average. Furthermore, as the point of sale continues to shift from stores to logistics facilities, they must carry greater levels of buffer stock, requiring larger buildings.

Individual order picking, packing and shipping direct to consumers also requires more space than store distribution, the report pointed out. Furthermore, floor space must be allocated to returns processing and re-stocking.

Prologis noted that the organization of fulfillment models is taking shape: E-commerce retailers will initially grow within their existing distribution networks, then move to leverage their multi-tenant facilities and third-party logistics to scale. Ultimately, however, they will require dedicated facilities for their e-commerce operations.