e-Commerce Trends in the U.S. and Its Impact on Economic Development
Technology has and will continue to impact our lives in numerous ways, from the way we shop to the way we work to the way we interact with our surroundings. Some trends loom larger than others, particularly in that of the way we shop. A tremendous amount of shopping is now done electronically, (eCommerce); 51% of purchases according to a survey by comScore reported in Forbes.com June 8, 2016, The electronic commerce industry has changed and will continue to impact the landscape of commercial real estate and any trend that impacts real estate will impact economic development efforts at both the local and state levels. Economic development agencies that 1) have the necessary assets for e-Commerce to thrive and 2) anticipate and respond to the continued e-Commerce market shifts, will prevail in gaining their share of project successes as the result of this booming segment of the economy.
E-Commerce, the buying and selling of goods and services over the internet, has early roots dating back to the 1960’s, but most agree officially developed strong legs in the 1990’s with Amazon.com leading the way. Amazon was founded in 1994 as an on-line seller of books competing directly with brick and mortar stores such as Barnes & Noble. Other online retailers, such as Walmart, followed suit, forever changing the buying behaviors of consumers.
A major milestone in the e-Commerce industry occurred just about one-year ago this month. During the 2015 Thanksgiving shopping weekend, online purchases outpaced in-store purchases for the first time. According to the US Census Bureau, total e-Commerce retail sales for the 2nd quarter of 2016 were estimated at $1,201.9 billion. This estimate increased 15.8% from the prior year sales period. E-Commerce sales in the 2nd quarter of 2016 accounted for 8.1% of total retail sales in the U.S. market.
With the percentage of e-Commerce sales continuing to increase, a by-product of the sustained growth is how it relates to the industrial real estate market. Retailers and logistics service providers are making important decisions about how close to place inventory to their customers as there is mounting pressure on key issues such as the last minute supply chain channel, where products are housed, what the desired service expectation is, and what the “acceptable” delivery window is in order to be competitive.
In addition to the point of sale decisions impacting real estate space demands, a significant element of the electronic buying experience is how returns are handled. For the consumer, the return process can be as meaningful, if not more so, than the original purchase itself. According to the National Retail Federation, about one-third of all products purchased online are returned and how these returns are handled is critically important. Will they be returned direct to the retailer, or will returns be outsourced to a third party logistics provider (3PL). Many retailers choose to outsource the return process to a third party, which in doing so results in an additional boost for industrial space demands around the country for companies that offer third party logistics services.
All of these decisions and demands lead to the “new generation” of warehouse space requirements. Today’s e-Commerce fulfillment centers are higher and more automated, with increased dock doors to facilitate shipping more and smaller orders in response to customer demand. There is a greater need for more parking spaces to meet higher man power needs, which also drives the need for these new facilities to be well located in closer proximity to population centers. Increased automation and changing building specifications and the need to locate on more expensive real estate near urban centers means that distribution center facilities are becoming more capital intensive. Because they are becoming more capital intensive, companies are increasingly focused on ways to offset one-time and recurring project costs, which is often accomplished through the procurement of economic development incentives provided by state and local governmental entities.
Many communities are specifically focused on attracting e-Commerce companies and have developed incentive programs that will directly offset short and long term development and operating expenses. States and communities understand that e-Commerce projects typically result in a high number of new jobs and involve significant capital investment, more so than traditional warehouse uses. Given the unique requirements of the “new generation” e-Commerce facility, new construction vs. existing real estate is often needed. This new construction creates new tax revenue for the state and local communities through generation of new sales tax, real and personal property, and inventory tax revenue. Because of the new positive fiscal impacts generated, economic development agencies may choose to be more business friendly in providing incentives to mitigate the new tax liabilities of such a user.
The Ginovus team has been involved in numerous e-Commerce location modeling and incentive procurement projects and have helped negotiate meaningful economic incentive agreements resulting in significant savings; by example,
- Corporate income tax credits tied to capital investment and job creation. Tax credits may be non-refundable, refundable, redeemable or salable
- Sales and use tax exemptions on machinery equipment
- Workforce recruitment, screening and training
- Cash grants to help offset machinery and equipment and/or eligible real estate development costs
- Tax Increment Financing
- Real and personal property real estate tax abatement
For the e-Commerce company it is vitally important to have a project team in place to help evaluate business climate, workforce availability and talent, transportation costs and economic development incentives.
We have honed our skills and continue to research and stay abreast of topics impacting the e-Commerce industry. Our goal is to continue to add value to our existing clients and to be prepared for the next wave of e-Commerce innovation because it is coming!