E-commerce proving to be a life raft for sinking real estate

A SURGE in e-commerce is proving to be a much-needed life raft for the sinking real-estate sector.

Digital sales in the US ballooned at Target, Walmart and Amazon last quarter as people shopped for food, outdoor supplies and home entertainment. All that stuff needs to go somewhere before it is shipped.

Target reported in August a new record, noting online sales increased a whopping 195 per cent for the second quarter.

The same month, Walmart said it almost doubled its e-commerce sales for the most recent three-month period, while the company led by Jeff Bezos still managed to notch a more than 40 per cent uptick for North America.

There is plenty of runway: Moody's Investors Service estimates that e-commerce penetration of retail sales will leap from around 15 per cent at the end of 2019 to about 30 per cent in the next five years.

Successful retailers are on the hunt for more space to meet the demands of digital shopping. For each additional US$1 billion growth in e-commerce sales, an additional 1.3 million square feet of distribution space is needed, said real estate consulting firm CBRE.

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Home improvement chain Lowe's, for instance, indicated it is looking to shore up its infrastructure in the next 18 months by opening more delivery terminals and fulfilment and e-commerce centres.

Given the trajectory, it is no wonder mall owners Simon Property and Brookfield Property Group are willing to acquire the bankrupt JC Penney for US$1.8 billion. One advantage is taking fallow space and hawking it for storage to the likes of Amazon.

There are around 1,130 malls in the US. Turning them all into warehouses could certainly flood the market. But there is plenty of room to give.

Large so-called anchor tenants traditionally pay US$3 to US$4 per square foot (psf) per month in long-term leases, while industrial space goes for about US$15 psf per month, said Land & Buildings founder Jonathan Litt. That is one reason that industrial real estate investment trusts (Reits), such as Terreno Realty, have held on better than their cousins focused on malls or commercial buildings.

Since January up till Aug 18, the sector's total shareholder return was up 13 per cent, while office Reits fell by a quarter, said Nareit, an industry organisation that represents real estate investment trusts. Warehouses are fast turning out to be lifesavers for struggling landlords. REUTERS