Prologis: Demand for warehouse space will rise alongside e-commerce growth

Dive Brief:

The shift from brick-and-mortar to e-commerce operations is expected to intensify as a result of the coronavirus pandemic, which will likely cause greater investment in warehouse space because e-commerce requires three times the logistics space of traditional storefronts, according to a new report from Prologis.
"Online order fulfillment requires more logistics space because 100% of inventory is stored within a warehouse (vs. store shelves), which allows for greater product variety, deeper inventory levels, space-intensive parcel shipping operations, and additional value-add activities such as processing returns," the report reads.
Prologis' Industrial Business Indicator, a measure of net contraction in activity within warehouses, grew from 25.8 in April to 45.1 in May. The quick uptick suggests any slump in demand for warehouse space will be short-lived, the report said.

Dive Insight:

In the U.S., e-commerce spending grew 93% year over year in May, according to a report from MasterCard. Following the pandemic and stay-at-home orders, it is a trend that experts expect to continue going forward.

Prologis' conclusion that the pandemic will increase demand for industrial real estate space is in line with another report released last month by commercial real estate company CBRE, which cited e-commerce, as well as companies looking to avoid disruption by relocating storage and manufacturing space as reasons for the growth.

"The downward trend in inventory-to-sales ratios since the early 1990s could reverse as manufacturers, wholesalers and retailers store materials and products closer to manufacturing centers and consumers," CBRE noted in its report.

"When you look at the mix shift that we had between e-commerce in our stores, that is something that we think will accelerate going into the future," Walmart CFO Brett Biggs said at the company's annual shareholders' m eeting this month. "So, our e-commerce business will become even more important than it has in the past."

Walmart has been supplementing its e-commerce fulfillment with store fulfillment as online orders have swelled, the company's CEO Doug McMillon said at the same event.

Likewise, as consumers turned to e-commerce for their retail needs in March and April, Amazon's fulfillment network got overwhelmed. The company extended shipping times and prioritized the delivery of essential goods. Part of returning to normal operations, including one-day shipping, was adding capacity to its network, Amazon CFO Brian Olsavsky said on an earnings call at the end of April.

"I had to restrict things that were coming into the warehouses, and focus on the essential products," Olsavsky said of how the company pivoted in the early days of the pandemic.

But managing an uptick in volume is not just about adding capacity, Wayfair COO Thomas Netzer said on the company's earnings call in May.

"It is less a matter of storage in our warehouses," Netzer said, pointing to the investment the company has already made in warehouse space. "It's much more model throughput." Wayfair is able to increase or decrease its workforce as needed, but it can also turn to some of its drop-shipping suppliers, he said.