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The Last Mile Dilemma: How E-Commerce Retailers are Impacting Commercial Real Estate

Jon Scalzitti, CPA and Michael Muoio
04.11.2018 | Berdon Industry Insights

In today’s digital-driven world, the expanding reach of the internet has increased the speed at which businesses and individuals connect with one another. E-commerce retailers have moved to the forefront of this change and have been tasked with making products available to customers at a faster rate. The final leg of a product’s journey from supplier to consumer—also known as “the last mile”—has become central to any e-commerce business. As such, to meet increased levels of demand as well as enhance the last mile delivery experience, the commercial real estate industry must work with the e-commerce sector to renovate existing warehouses and develop new facilities.

Challenges with the Last Mile

In the past, the postal service struggled with the last mile in its day-to-day operations, and despite maintaining postal service distribution centers in nearly every ZIP code and a promise to make deliveries through rain, sleet, and snow, it still could not perfect the delivery method to keep up with rising demand for faster deliveries. E-commerce giants are now tackling this issue by cutting costs to give the consumer a positive experience to encourage continued use of their services. A study by McKinsey shows that approximately 50% of the total delivery cost comes from “last mile” implementation, creating a need for technology, private investment, and larger distribution centers to pick up where the postal service has begun to lack.

Additionally, since no customer is the same, their delivery patterns and their needs—such as delivery speed—are different. Major e-commerce retailers are now competing with each other by offering incentives, such as free shipping, two-day shipping guarantees, or other perks included with their online purchases. With this added competition, retailers are tasked with coming up with a better solution to effectively deliver on customized orders received from a wide variety of people.

Real Estate Impact

In recent years, there has been an increase in the number of people preferring to live in urban centers rather than rural areas. This concept is important when attempting to make cost-effective deliveries, as the location of distribution centers is key for major e-commerce retailers. Given larger populations in urban areas are more concentrated, having a larger warehousing infrastructure, as opposed to smaller warehouses that are dispersed geographically, is now necessary to fulfill one- or two-day shipping orders from the millions of people shopping online.

Retailers’ need for warehouse space near urban centers has become crucial to their competitive positioning, as customer retention and acquisition are more directly tied to their ability to keep inventory in nearby facilities than ever before. As such, real estate investment trusts, developers, and private equity funds are clamoring for this highly sought after, dwindling space.

In the New York Metropolitan Area, large parcels of land, particularly industrial properties, are being purchased and developed for a broad range of warehouse users and to attract e-commerce tenants. Important features for potential warehousing operations include sufficient clear height ceilings and loading dock infrastructures. In September 2017, Amazon purchased a 200-acre plot of land on Staten Island with hopes of building an 855,000 square foot distribution center. Along with this major development, there have been similar transactions in other areas within the New York Metropolitan Area, such as Red Hook in Brooklyn and sites along the New Jersey Turnpike. Similar trends are occurring throughout the United States, including in the suburbs of Chicago and Los Angeles. Many distribution centers are strategically placed along major highways and thruways so the products they house can be delivered at an expedited rate. Additionally, warehouses are generally placed equidistant from multiple major cities so that e-commerce retailers can maximize their potential consumer reach.

Real estate in the suburbs of major cities is currently viewed at a premium with the influx of people moving into major metropolitan areas. Large plots of land can be developed into major distribution centers for the growing e-commerce market, and when the distribution centers are functional, they will be among the best methods for e-commerce companies to enhance the “last mile” phenomenon within the supply chain.

Questions? Contact Jon Scalzitti 212.331.7579 | jscalzitti@berdonllp.com or reach out to your Berdon advisor

Berdon LLP New York Accountants