One of the big changes happening in eCommerce and retail more generally is the conversion of former retail stores into warehouse or fulfillment centers. The growth of eCommerce has increased demand for industrial real estate in the United States and Canada. JLL says, by 2025 an additional billion square feet of real estate will be needed to service the growth. efulfillment centers will require additional square footage as well as more space. Particularly in closer proximity to their final customer. This reduces overall cost for both the customer and the retailer. This is an indication that the markets are optimistic about the long and medium term prospects of eCommerce. As companies start renegotiating leases as more stores shut down, there has been a marked spike in fulfillment center numbers.
Space Needed
Notably, eCommerce operations need more than three times the industrial space per sale than traditional retailers. According to JLL, in 2020 about half of US industrial real estate leases are associated to eCommerce. Prior to this year that number was at 35%. The same goes for cold storage facilities. JLL indicated that an additional 100 million square feet will be needed to keep pace with the current demand. San Francisco based real estate investor Prologis gathers that for every billion dollars in sales, 1.2 million square feet of warehouse space will be needed.
Industrial Real Estate
Industrial real estate for this purpose has caught the eye of real estate investors because of the long term economic outlook. Commercial real estate developers have been listening to the market. They are making the big investments, as 100 million square foot of real estate became available in Q4 last year. Vacancies are low and rents have gone up as a result. Many lease any property they can find to meet demand. In recent years, industrial real estate particularly warehouses and big distribution facilities has been the smart investment due to eCommerce. Unsurprisingly, this has accelerated since March.
Different retailers have varying approaches to efulfillment with some like Walmart and Meijer making use of dark stores. Walmart have plans for a fifth warehouse in the Greater Toronto area. They will open a state of the art 550,000 square foot facility in Vaughan, Ontario. This is part of a larger 3.5bn investment over the next five years. It includes a 300,000 square foot warehouse in Surrey, B.C. This includes upgrades to many of its 11 existing facilities strategically scattered across Canada.
Other retailers are opening smaller warehouses closer to their customer base in big cities. Rents have added pressure to many retailers and some have been converting local former convenience stores to fulfillment centers. Target, Wholefoods and Bed Bath have started converting some of their retail stores into fulfillment centers. This reduces pressure on the main fulfillment centers, allowing quicker delivery from local former retail stores.