The COVID-19 pandemic has led to unprecedented online shopping for holiday gifts and supplies. But as anyone who has ever given or received a Christmas present knows – returns are an inevitable part of the process.
Since so many presents were bought online and shipped to the buyer, versus them going to the store to pick them out, those returning them will also have to mail those unwanted gifts back rather return them to store for something else.
A recent report by CBRE forecasts online returns to hit a record $70.5 billion this holiday season, a 73% increase from the previous five-year average. CBRE’s forecast, which is based on National Retail Federation data, estimates online purchases this holiday season will reach $234.9 billion, a year-over-year gain of 40 percent. With an average return rate of 30 percent for online purchases, it’s easy to see why the overall number of returns will jump significantly.
That’s an increase in what the industry commonly refers to as “reverse logistics” that should stretch the limits of an already overburdened ecommerce industry and drive demand for more logistics facilities in the commercial real estate industry.
Optoro, a provider of returns technology and services for processing retail returns and CBRE’s partner for the report, estimated that a reverse logistics supply chain requires an average 20 percent more space and labor compared with traditional forward logistics.
With such industrial space already incredibly tight, that presents challenges in the commercial real estate market.
The good news, says Vincent Ranalli, executive vice president for CBRE in the Greater Lehigh Valley, is this region is already well positioned to take advantage of, and ultimately handle, the demand. Because of the proximity of the Lehigh Valley in the Northeastern corridor of the U.S., that demand for logistics centers has been strong.
“There are new tenants each week that want to locate here,” Rannalli said. “We’ve had a record year. We’ve had the highest absorption rate for industrial properties.”
He said a good deal of that demand is coming from ecommerce companies and third-party logistics providers attracted to the location and amenities like Fed Ex Ground and the recently upgraded UPS facilities.
“In parts of the market, 500,000 square feet and up, there’s very little inventory. It’s pretty scarce. Sometimes two or three tenants are looking at the same building at a time. It’s very competitive,” Ranalli said.
Demand will continue
But as many in the commercial real estate industry have said, the COVID-19 related boon in ecommerce activity had just accelerated the demand for logistics facilities. The need will remain and grow even after the country comes out of the pandemic.
“There’s going to need to be more buildings built to meet the demand,” he said.
The region has already strong growth of speculative construction in logistics, so the commercial real estate market should be able to meet the demand, Ranalli said.
He cites two of CBRE’s projects, one at 2020 Feather Way in Bethlehem, a nearly 300,000-square-foot building that was finished in November and is ready for tenants; and the former 600,000-square-foot Ingersoll Rand property on Memorial Parkway in Phillipsburg, New Jersey, that has already received a lot of interest from potential tenants.
CBRE also participated in the September groundbreaking in Upper Bethel Township of the River Pointe Commerce Park, owned by River Pointe Logistics.
Other developers have also been bringing logistics center projects to the region recently. Core5 just announced it would soon begin a logistics center in Landsdale, Bucks County. Earlier this month, Transwestern Development Co. broke ground on the Hamburg Logistics Center in Berks County.
Ranalli said the reason that reverse logistics is creating such a demand for space and labor is because it is time sensitive.
“These goods need to be processed quickly or they lose value,” he explained.
For example, a warm sweater purchased in November wouldn’t be in high demand if it didn’t get back on a website for sale until spring.
That’s why bricks and mortar retailers have always put so much effort into post-Christmas operations making sure goods are returned, labeled and put back on the shelf as quickly as possible while the demand is still high.
Not all returns can be successfully discounted and put back in rotation. Optoro estimated that returns produce 5 billion pounds of waste in landfills annually.
The demand, of course, isn’t just in the Lehigh Valley.
CBRE Economic Advisors estimated that 1.5 billion square feet of industrial space will be added in the U.S. over the next five years to meet growing ecommerce demand.
Ranalli said also that companies that currently occupy second-generation space are expected to upgrade to these newly constructed buildings, which will allow reverse logistics occupiers to lease a greater portion of Class B space.
As much as 400 million square feet of this space could be used to process returns in the next five years.