CBRE report points to reverse logistics gains paving the way for increased development

While there has been a heightened sense of attention being paid to the overload of goods ordered online this holiday season, due, in large part, to the COVID-19 pandemic, one inevitable aspect of the frenetic pace of holiday-related e-commerce activity will be how much of an impact it will have on reverse logistics.

That was a key theme of a report recently released by Los Angeles-based industrial real estate developer CBRE, entitled “Reverse Logistics Stress Test: Holiday E-Commerce Spike Will Lead to Record Returns.”

The report put the anticipated impact of reverse logistics, for this holiday season, into perspective, citing the National Retail Federation’s (NRF) estimate that total 2020 online holiday sales are pegged to see a 40% annual increase, to $234.9 billion, with almost one-third—up to $70.5 billion—of these purchases expected to be returned. And it added that these returns can “cause enormous stress to distribution networks, adding significant costs for retailers,” with reverse logistics costs equating to 59% of the costs of an item’s original sales price.

“The surge in e-commerce demand this holiday season will lead to a corresponding spike in returns, according to Optoro, a reverse logistics software provider,” the report stated. “E-commerce sales have a much higher average return rate of up to 30%, and this is even higher during the holiday season.”

As for the intersection of reverse logistics and the industrial real estate opportunities they provide, CBRE pointed to Optoro data that showed how a retailer’s supply chain requires four-to-seven times more space allocation at peak periods, and it also pointed to how there are limited warehouse space options, as demonstrated by 22 U.S. industrial markets having vacancy rates that are below the national average of 4.7%.

“[M]ore forward orders mean more inventory coming back, increasing space demand especially during the holiday season,” wrote CBRE.

What’s more, the report noted that reverse logistics supply chains require, on average, up to 20% more space and labor capacity when compared to forward logistics. While that statistic is impressive, what is even more so is an estimate from CBRE Econometric Advisors, indicating that e-commerce growth will result in an additional 1.5 billion square-feet of industrial space over the next five years. And it also stated that reverse logistics and inventory control are also serving as drivers for increased warehousing size requirements, with the average size of warehouse leases at more than 100,000 square-feet, coming in at a record 272,000 square-feet in the third quarter of 2020.

And this, in turn, creates major opportunities for 3PLs, according to the report.

“Many retailers use 3PL providers for their returns management to free up premium space for forward logistics,” it said. “This is a viable option for retailers that have a thin supply chain network and allows them to focus on other aspects of their business. As a result, 3PL providers have become a major driver of industrial real estate demand. As of October 2020, 3PLs accounted for 27.1% of the transaction volume for deals of 100,000 sq. ft. or more, compared with 22% for e-commerce occupiers. Large 3PLs that offer reverse logistics services include XPO Logistics, Geodis, FedEx, UPS and NFI Industries.”

On a CBRE-hosted media call yesterday, John Morris, CBRE Executive Managing Director, Americas Industrial & Logistics & Retail Leader, noted that in this period, during the pandemic, which has seen carriers struggle with capacity challenges like driver availability and lack of equipment, higher than ever e-commerce delivery and warehouse costs, 2020 has been a very expensive year for the forward supply chain.

“But one of the things all retailers have been really good at this year is securing off market spot transportation and warehousing space,” he said. “When the forward supply chain takes a bit of a break after the New Year, there will be those drivers and that equipment—some of it rented—that will be able to handle quite a bit of these expanded return volumes. There will still be quite a bit of strain on the reverse supply chain, but it is good news that we are coming through a COVID period where supply chain capacity itself is somewhat expanded.”

And Matt Walaszek, CBRE Director of Research, Industrial & Logistics Research, said on the call that with 1.5 billion square-feet of industrial space to be delivered over the next five years for what he called “modern classic space,” for occupiers that are currently in second generation, or Class B, space.

“That will leave more Class B space leftover for the purpose of reverse logistics,” he said. “As this process continues to grow year-over-year, which we are expecting in the form of up to 400 million square-feet, more space could be needed to process returns.”

Walaszek also observed that the industrial logistics real estate space is continuing to experience tight market fundamentals, with vacancy rates at 4.7%, which he said speaks to the need for more industrial space stock.

“It is coming online, but the demand right now is quite high, given the fundamentals of the market and the expansion of e-commerce,” he said.