In early July, real estate and investment giant JLL Inc. (NYSE:JLL) published a five-year outlook for U.S. e-commerce demand and logistics warehousing capacity. The projections elicited “ooh-and-aah” types of responses, mainly because of the large numbers being bandied about. U.S. e-commerce sales would hit $1.5 trillion by 2025, while demand for logistics real estate would increase by an additional 1 billion square feet, JLL predicted.
Nearly three months later and with the benefit of hindsight, Rich Thompson (pictured), who headed the team that developed the report, realizes those projections were “very, very conservative.” Adding 1 billion square feet over five years to an industrial market that currently stands at 13.5 billion square feet–about 80% of that being logistics, the rest manufacturing–seems “like a no-brainer,” Thompson, JLL’s global supply chain and logistics consulting leader, said in an interview with FreightWaves earlier this month.
Thompson’s remarks capture the situation that logistics real estate experts like JLL find themselves in: E-commerce growth is dynamic and explosive. No one really knows how big online ordering can become, especially if a transformative year like 2020 becomes a catalyst for a radically and permanently changed retail ordering and fulfillment landscape. As a result, no one, not even the subject matter experts, knows how much real estate will be needed to satisfy future fulfillment needs. The JLL report was prepared by company executives who live the business every day, not by academics or consultants brought in for the project, Thompson said.
What experts are recognizing is that it will be easier to understate the future of e-commerce and logistics real estate than to overstate it. Prologis Inc., (NYSE:PLD) the world’s largest developer, owner and operator of logistics warehouse properties, estimates that e-commerce customers require 1.2 million square feet of distribution space for every $1 billion in sales. Under that formula, e-commerce requires three times the space of traditional throughput distribution. The additional 1 billion square feet by 2025 that JLL projected over the summer could actually become an additional 3 billion square feet by mid-decade, Thompson reckons.
The uncertainty over needed warehouse space is due to the dynamism of e-commerce itself. At the end of 2019, e-commerce in the U.S. was a $602 billion business, according to data from Digital Commerce 360 that JLL relied on for its forecast. Going into 2020, e-commerce was growing by about 14.5% year-over-year, according to Thompson.
The shifts to online ordering triggered by the COVID-19 pandemic elevated the 2020 growth rate to 20%, the July report said, again citing Digital Commerce 360 forecasts. JLL said that e-commerce has accounted for half of its 2020 industrial leasing activity. Before the pandemic, it was at 35%. JLL’s industrial activity consists of manufacturing and logistics projects.
But this year’s e-commerce growth could well exceed the 20% threshold. Online demand this holiday season is expected to be unprecedented. Just how unprecedented is anybody’s guess. What’s more, the projections of 18% annualized growth, which is how JLL arrived at the $1.5 trillion figure for 2025, could be at the low end. If so, the forecasts from July could end up being way off on the low side.
JLL is mindful of the inherent risks of any multi year forecast. That’s why the duration of its projections typically stays within the band of one year or less. On a personal level, Thompson knows all about the uncertainties of projections. The executive, who like many in the field travels extensively on business, had expected early in the pandemic to be back on the road in a couple of months. Instead he was set to take his first flight at the end of September.