Free Returns: How Reverse Logistics Impacts Industrial Real Estate
The industrial sector has been the preferred asset class of commercial real estate in recent years. “The rate of return for industrial real estate has been higher than that of any other class for nearly half a decade,” says Jeff Rinkov, CEO of Lee & Associates.
These rates of return are the result of permanent changes in consumer behavior and preferences — and recent events are driving more rapid changes in consumers’ e-commerce shopping.
Though it remains to be seen how the economic impact of the coronavirus will influence various sectors of real estate, the pandemic has meant a sudden uptick in reliance upon industrial real estate as consumers turn to online shopping in the face of in-store shortages and shelter-at-home orders or social distancing practices. As brick-and-mortar stores close temporarily, retail companies and logistics professionals grapple with the increased volume of both online orders and e-commerce returns.
What do facilities for e-commerce look like as customer expectations for e-commerce grow? How do companies process returns in an efficient and cost-effective manner, a critical element of success for e-commerce companies?
Consumers increasingly prefer to shop online instead of going to brick and mortar stores. E-commerce sales accounted for more than 11 percent of total retail sales even before COVID-19 quarantines began, and the volume of sales is growing. Worldwide, e-commerce sales exceeded $1.5 trillion last year.
But up to 30 percent of online purchases are returned, and for certain categories, like clothing, the return rates are even higher. Sometimes customers order multiple options with the express intent to return some merchandise — for example, ordering the same style of pants in multiple sizes with a plan to keep only the item that fits best. This marks a significant difference from typical in-store behavior.
“The way that retailers handle customers’ returns is key to success,” notes Craig Hagglund, Principal of Lee & Associates Oakland and Co-Leader of Lee & Associates Industrial Specialty Practice Group. Reverse logistics processes impact customer satisfaction, brand value and the retailer’s bottom line.
He explains, “Increasingly, retailers must offer free returns and an easy returns process to remain competitive. But retailers also need to process the returns quickly, minimizing the need for warehouse space to store goods that depreciate by the day. Companies want to minimize processing and storage costs — and they want to get returned goods out to the next buyer or stocked for warranty replacements as soon as possible.”
According to Optoro, a logistics software startup, electronics depreciate 4 to 8 percent per month, while fashion depreciates 20 to 50 percent within two to four months.
Real Estate Impact and Footprint
In terms of its real estate impact and footprint, a reverse logistics supply chain requires as much as 20 percent more space than a traditional forward-flowing logistics supply chain, per Optoro research.
Modern though this business may be, older-generation space tends to be preferred over newer top-of-the-line warehouses. “Buildings with lower ceiling heights are more frequently used given the difficulty of stacking irregular and oddly shaped pallet-loads onto tall racks,” Hagglund says.
Reverse logistics operations are increasingly being handled by third-party logistics (3PL) companies. This allows retailers to maximize their space for outbound logistics while 3PL firms such as C.H. Robinson, XPO Logistics and UPS Supply Chain Solutions maximize retailer overhead, according to Logistics Management.
One challenge of online return is retrieving goods from the consumer and processing them quickly while minimizing depreciation and loss of economic value. This difficulty has led to the development of small, dedicated sites where consumers can return goods more efficiently. Factors like this are driving e-commerce companies and their 3PL partners to increasingly supplement their network of regional distribution centers with smaller, satellite facilities capable of reducing lead times and providing greater flexibility and service consistency.
“This has led to an increase in demand for warehouse space located closer to consumers,” Rinkov says. Lee & Associates advises a wide array of e-commerce related concerns throughout North America. E-commerce, along with food distribution, continue to expand and absorb industrial space in light of the current crisis.
As commerce trends towards faster, more flexible and more essential delivery and returns, industrial commercial real estate will have to become creative in order to keep up with customer demands.