E-Commerce Growth Slowed In Q3, But Demand For Industrial Space Remains Strong

Despite slumping numbers in the third quarter, e-commerce growth is continuing to keep demand for industrial space high, according to new research from CommercialEdge.

E-commerce accounted for 16% of core retail sales in Q3, down from a peak of 19.4% in the second quarter of 2020 but a number that’s still above pre-pandemic levels. Prior to COVID-19, the Census Bureau typically reported quarterly e-commerce growth in the neighborhood of between 2 and 6% and year-over-year growth came in at between 10 and 20%. But “COVID-19 upended this trend in a dramatic way—in the second quarter of last year, e-commerce sales jumped 31.9% on the quarter and 43.8% year-over-year,” the report notes. “Following that spike, e-commerce sales fell for the first time ever, and three of the five most recent quarters have seen declines.”

But despite that, online sales are still “well above” pre-pandemic levels, CommercialEdge analysts note.

“We believe that some of the shift to e-commerce over the last two years was structural rather than temporary, and e-commerce will continue to fuel the industrial market,” they say.

Amazon remains the dominant player, accounting for between 40% to 50% of all e-commerce sales. The e-commerce giant picked up 12 properties larger than 3 million square feet this year through lease and purchase transactions in cities from Chicago and Houston to Little Rock and Colorado Springs.

Similarly, Target and Walmart both noted in third quarter earnings calls that despite slowing growth of e-commerce sales, physical stores remain critical for the brands’ online footprints.

“Instead of occupying massive distribution centers, these companies use their stores to fulfill orders,” the CommercialEdge report notes. “Target reported that while online purchases accounted for 17.6% of all sales in the third quarter, stores fulfilled 96.7% of orders. Omnichannel retail—providing customers with a seamless, consistent experience between online and brick-and-mortar—will become more prevalent in the future.”

Rent growth remains highest in the Inland Empire region of Southern California and in Los Angeles, both of which have posted growth of 6.2% over the last two months.  Nationally, rents for industrial space clocked in at an average of $6.37 per square foot in December. The IE, Los Angeles, and Orange County all rank in the top five for largest spread between average and new leases: Orange County has the largest spread between new and average lease cost at $2.58 per foot, followed by Los Angeles ($2.10), Nashville ($1.94), New Jersey ($1.86) and the Inland Empire ($1.82), the report notes. Generally, those spreads are largest where vacancy is tightest and a lack of available land for development limits new construction.  Vacancy rates are lowest in the Inland Empire (1%), Columbus (2.3%), Nashville (3.0%), Los  Angeles (3.1%) and Orange County (3.4%).

Nationally, around 293 million square feet of new industrial projects were delivered as of December, with an additional 555.4 million square feet of new supply under construction. Around 520 million square feet is in the planning stages.  Of all US metros, the pipeline in Philadelphia is flourishing, thanks to its close proximity to the ports of New York and New Jersey. Yet in most markets, tenants will still struggle to find space as brands clamor for suitable fulfillment and logistics spaces.