Wanted: 1 Billion Additional Square Feet of Industrial Warehouse Space by 2025

In a world of retail industry hurt, both for merchants and landlords, one corner of real estate is doing well and is expected to for years to come: industrial.

Demand for warehouse space dedicated to retail uses is blazing as companies race for space of all sizes to fulfill their e-commerce needs. Online shopping, a necessity during the pandemic-induced quarantines, is expected to continue an upward spiral as consumers who were once leery of using their computers and smartphones to order, say, everyday sustenance items such as groceries, are now embracing it.

Using a mathematical projection for retail’s e-commerce needs alone, real estate services firm JLL is predicting the industry’s industrial space will explode by 1 billion square feet between now and 2025. That adds to CoStar analysis this year that traditional retailers will grab up more warehouse space for logistics and distribution centers as they seek to match the e-commerce lead of online retailer Amazon.

That includes plants, warehouses, distribution and last-mile facilities — some of which will be placed in traditional industrial sectors outside large urban and suburban areas as well as some that might be near or part of neighborhood shopping centers.

Prologis, the logistics facilities giant, estimates retailers of all sizes will require 1.2 million square feet of distribution space for each $1 billion in sales. That means e-commerce requires three times the space as traditional distribution, according to the developer.

The $602 billion that retail data firm Digital Commerce 360 logged in 2019 for e-commerce sales and an estimate of 20% online sales growth in 2020 alone and beyond adds up to a hefty $1.5 trillion in sales by 2025, by JLL’s calculations.

By then, estimates are that e-commerce sales, still in the mid-teens in terms of the overall piece of the retail sales pie, will jump to 30% of all sales by 2025, according to Craig Meyer, JLL’s president of industrial services and a 40-year industry veteran.

“The trend line is inexorable,” he said. “This is happening.”

Before most Americans were ordered to stay at home as the cases of COVID-19 multiplied, JLL pegged as much as 35% of its industrial leasing was directed to e-commerce space. Once the online ordering was in full force, JLL saw an uptick in industrial space requirements — and with incredibly quick turnover from one tenant to the next — for retail-related uses that is now standing at 50% of all leasing activities this year.

The evolution of fewer stores toward more online shopping has picked up a tremendous amount of velocity during the pandemic. “This is the most profound change we’ve seen in the last 10 years,” Meyer said.

Big Names Expand Networks

Amazon, of course, has had a heavy hand in that, as has Walmart, Target, Costco and other big-box retailers. But it’s happening in all areas of the industry as retailers are learning that so-called omnichannel shopping is no longer a frill but a necessity, even when the dark clouds of ambiguity about the future of the coronavirus continue to hang over the landscape.

“Even during a period of unprecedented uncertainty, we’re witnessing power-center retailers such as Walmart aggressively bolster and invest in their distribution networks in order to compete with Amazon, meet the needs of their customers and grow their e-commerce platforms,” said Abby Corbett, managing director and senior economist in CoStar’s Chicago office.

Consider her math as well: “Roughly less than 30% of Target and Walmart’s distribution space is oriented to e-commerce,” she said. “This compares to 100% for Amazon.

“So, e-commerce penetration and adoption will translate to increased investment in fulfillment capabilities, including last-mile, for many retailers that need to catch up to Amazon’s capabilities,” she added.

JLL’s projections don’t take into account how that 1 billion square feet will net out. Will it be new space or a repurposing of existing space? What about anticipated increases of retail inventory or a resurgence in U.S. manufacturing?

“These solid fundamentals and the fact that e-commerce still has a long runway for growth makes industrial real estate the darling of the commercial real estate industry,” Meyer said.