The Many Ways in Which E-Commerce Changes the Retail World for the Better

E-commerce companies, led by Amazon, have been assaulting traditional brick and mortar stores for almost as long as the internet has been around. They allow shoppers to have access to an inordinate number and types of products without having to leave the comfort and convenience of their own home. In the fight for market share, that convenience has become a priority for retailers attempting to minimize the waiting period between ordering their product and delivery. In order to adapt and stay relevant, retailers are changing how they manage their supply chain and where they choose to locate their warehouses. The changing environment is also affecting the real estate market and the legal requirements of the real estate clients. 
 
One of the main benefits of going to a physical store is the immediacy of the purchase and the instant gratification that comes with it. In fact it goes beyond instant gratification. If a customer needs an item immediately, waiting 5-7 business days is not feasible. In 2005, Amazon began the movement to provide free two day shipping to customers who join their Amazon Prime service. It has been followed up by companies with similar services, such as ShopRunner, which provides free two day shipping for hundreds of online stores. In order to stay ahead of the pack, last year Amazon began speeding up their delivery times with the introduction of Amazon Prime Now. The new service guarantees same day delivery of “tens of thousands” of items within 23 metropolitan areas and specific items are guaranteed to be delivered in less than two hours at no cost (or within an hour for $7.99). 
 
The race for instant delivery and the resultant need for accessible inventory had a profound effect on the industrial real estate market. In order to deliver products with such breakneck speed, retailers need to maintain warehouses in or near urban areas. As a result, the value of industrial properties in metropolitan areas is on the rise. New York is a prime example. Owners of industrial sites in Queens saw their property value rise by nearly 60 percent from 2013 to 2014. Some are calling this the “Amazon Effect.”
 
Additionally, as the market for industrial properties continues to heat up, construction and development of these types of spaces is rising dramatically. Such new projects are particularly competitive as the large blocks of space for development are becoming increasingly difficult to find, making new industrial development projects, particularly those near major metropolises and shipping ports, highly coveted.
 
As a side note industrial properties located in attractive urban sites are also highly coveted as conversion opportunities. In fact, some of the finest apartment buildings with large apartments and fabulous high ceilings have been created out of industrial warehouses.
 
Online retailers also need significantly larger warehouses than traditional brick and mortar stores due to the necessity to break down packages to individual pieces in order to ship individual orders directly. Warehouses for brick and mortar stores can send much larger packages, delivering all items that each store will need. For example, Amazon’s average warehouse is roughly 33% larger than an average competitive retailer's warehouse. 
 
The current change to the demand for industrial warehouse space coincides with a decrease in demand for storefront retail space. A recent study by Civics Economics and the American Booksellers Association published in January 2016 found that the shift to online shopping has already reduced demand for retail space by over 107 million square feet, the equivalent of over 30,000 traditional storefronts. If Amazon is able to make Prime Now as cheap and affordable as they hope, consumer habits will begin to change further.
 
The 1990s saw the rise of the big box retail stores. The current changes foreshadow more monumental shifts in land use on the horizon. Retailers and landlords will need to adjust themselves to the changing market and they will need law firms to help them adapt. Clients need lawyers who understand the market and can provide them with business advice on what challenges await them and what they need to prepare for.

J. Philip Rosen, co-head of Weil's Real Estate and Infrastructure Practices, has advised on many of the largest and most complicated US real estate-related transactions over the past 30 years.  He is considered the leading expert in the industrial property arena, which has been a hotspot of late as cities look to convert industrial buildings to residential spaces and e-commerce companies seek similar sites for distribution centers. Mr. Rosen’s deep knowledge of the industrial sector has helped him become a foremost expert in e-commerce development. He has handled four of the five largest deals in the industrial real estate sector.  

Philip can be contacted on +1 (212) 310 8604 or by email at philip.rosen@weil.com 
 
Joseph Sadon is an associate in Weil’s Real Estate practice in the New York office.  Mr. Sadon has been part of the teams advising on a broad range of commercial real estate transactions, including the sale, acquisition, development, management and leasing of various types of commercial real estate properties. He also assists with complex real estate financings, including construction lending, portfolio acquisitions, mezzanine loans and equity investments.

Joseph can be contacted on +1 (212) 310-6716 or by email at joseph.sadon@weil.com