International E-Commerce Growth A Wild Card For U.S. Industrial Demand

U.S. industrial real estate has had a strong run since the coronavirus pandemic inspired a spike in e-commerce, but its post-pandemic fate is less certain, depending on whether online sales growth continues, plateaus or even slows down.

Yet the demand for U.S. warehouses and distribution centers might not depend entirely on trends in domestic e-commerce. The continued worldwide growth of e-commerce, including in relatively nearby foreign markets, might help drive another strong year for American industrial, experts say.

"The rapid growth of e-commerce is a global phenomenon, which has led to a significant demand for cross-border industrial e-commerce facilities," said Vince Roche, JLL executive managing director, industrial occupier services, Mexico. 

One example of the dynamic involves Chinese goods being shipped into Mexico, then repackaged and distributed to Southern California, Roche said. 

"Mexico's proximity to the huge consumer market of Southern California and the expansion of cross-border e-commerce fulfillment centers are fueling a high demand for big-box industrial space in the market, with vacancy rates reaching new lows," he said.

The Port of Los Angeles and the Port of Long Beach continued to see record volumes of goods shipped through them as of early 2021, according to JLL data. Though activity in those markets slowed down markedly early in 2020 as the pandemic gripped the world and trade disputes with China dragged on, during the second half of the year, the twin ports saw record container volumes, and U.S. e-commerce sales grew to elevated levels, spurring demand for industrial space.

Total vacancy in the markets stood at 3.1% at the end of the year, up from early in 2020, but still relatively low compared with the post-recession years early in the 2010s, when marketwide vacancies were up to around 5%. During Q4 2020, according to JLL, all submarkets across Los Angeles posted positive absorption for the quarter.

The other U.S. market most likely to benefit from international e-commerce growth is South Florida. It too saw an uptick toward the end of 2020.

Demand for industrial space in Miami-Dade County resulted in positive net absorption of 787K SF in Q4 2020, reports CBRE. The largest occupancy in the quarter was Kuehne+Nagel, a global logistics specialist, which took about 209K SF at Prologis MIA Business Center.

“Latin America contains several of the next big e-commerce growth markets," CBRE Florida Leader of Market Research and Insights Brandon Isner said. "Although the cross-border share of e-commerce to Latin America shrunk in 2020, it is expected to recover by the end of 2021, and grow to about 17% of total Latin America e-commerce by 2023."

The South Florida distribution and fulfillment network handles a portion of that activity, so it is likely to benefit from that growth, Isner said.

Currently, the fastest-growing regional e-commerce market worldwide is Latin America. Last year, total online retail sales in the region ballooned 36.7%, to about $84.9B, compared with a worldwide increase of 27.6% and a North American increase of 31.8%, according to eMarketer. Relatively remote Argentina was the fastest-growing in 2020, but the much closer markets of Brazil and Mexico also saw considerable e-commerce growth last year, up 35% and 27%, respectively.

"Before COVID, people in Latin America weren't yet fully comfortable with online shopping, but the situation forced them to be," SkyPostal President and CEO A.J. Hernandez said. "And I don't think that that comfort level will drop significantly once the pandemic cools off, like in a lot of places."

Moreover, Hernandez, whose company specializes in private mail and parcel delivery in Latin America, said that the pandemic is likely to linger longer in Latin America than in North America or Europe, thus reinforcing the growth of e-commerce in the region.

"I read today that everyone in the U.S. is expected to have access to the vaccine by July," he said. "Unfortunately, I'd be surprised if that were the case in Latin America. Even if they had it by December, I'd be surprised."

Hernandez also expects international e-commerce-related logistics to grow in spite of the current economic tumult in the logistics sector that is putting upward pressure on shipping prices and has disrupted supply chains.

This year, importers might see a doubling of ocean freight rates in the trans-Pacific, container shipping news site JOC reports, to the range of $2K to $2,500 per forty foot equivalent unit, or FEU, a measurement of intermodal containers. Other sources tell JOC that shippers might experience 20% to 30% rate hikes from container lines and smaller increases from intermodal rail and trucking providers. 

Beginning in January, FedEx implemented a general rate increase of 4.9%, and UPS will probably raise its rates as well, according to JOC. Also, parcel carriers are using surcharges more than in previous years.

"Shippers are trying to build 2021 budgets around a possible return to pre-pandemic market patterns, and an equally possible transition to a ‘new normal’ whose economics are not yet understood," Hernandez said, adding that shippers need to budget for wide, sudden and unpredictable cost increases.

Not every industrial expert is persuaded that the growth of e-commerce in other countries will have a profound impact on U.S. industrial space, however. 

"You can’t fulfill e-commerce orders from Florida or Texas and get them to Latin America within the normal 48-hour window that is required to be competitive as an e-commerce retailer," Duke Realty CEO Jim Connor said in an email to Bisnow.

Nevertheless, he believes that reshoring or near-shoring of U.S. manufacturing operations will create more new distribution channels throughout the U.S. markets. 

Also, Connor doesn't expect the domestic demand generated by e-commerce to drop off as the pandemic ebbs, a situation that will continue to be good for U.S. industrial properties.

"Customer and market share gained by e-commerce companies will not be lost, and other drivers continue to positively impact the industrial real estate industry. Safety stock is now necessary for expanded inventory for major U.S. retailers and consumer products companies, and is anticipated to drive in excess of 500M SF of growth in the next few years."

Another major industrial owner, CenterPoint Properties, likewise remains bullish that e-commerce activity will remain high through 2021.

"We’re been highly confident in our investment strategy to target facilities near ports, which CenterPoint adopted years ago," CenterPoint Senior Vice President, Investments, Rives Nolen said. 

"We've been among the most active investors in submarkets near the ports of Seattle and Tacoma," Nolen said. "We've closed on, and are developing, numerous other properties near the ports of Los Angeles/Long Beach, Oakland Seaport, Port Everglades and Port Newark/Elizabeth."