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Is There A Real Estate Solution To E-Commerce's Returns Problem?

E-commerce is the single biggest driver of the industrial real estate market and growing, but it has a glaring inefficiency. If we get everything we need delivered to our homes, why is it so difficult to send it back?

CBRE Vice Chairman Michael Hines, High Street Realty Co. CEO Bob Chagares, J.G. Petrucci Co. Executive Vice President Peter Polt and Endurance Real Estate principal Ben Cohen

Distribution centers are being built all over the country, many as big-box facilities that in some cases require clearance of up to 40 feet. Last-mile distribution centers, designed to be leaner to make use of tighter spaces close to major cities, are beginning to crop up — like a rumored Amazon warehouse close to the University of Pennsylvania’s campus in West Philadelphia. Real estate is changing shape to better fit e-commerce, but only the sexy part. Returns are still a worry.

“It’s a huge issue for retailers,” High Street Realty Co. CEO Bob Chagares said. “Up to 30% of e-commerce purchases are being returned today, which is a giant amount of product going upstream that doesn’t go upstream very well.”

Most e-commerce returns are sent through the Postal Service, then dumped in a warehouse to be gradually sorted through. Once processed, according to Chagares, the products are often worth a tiny percentage of what they retailed for.

“It’s a $220B problem globally today, and for low-margin businesses, it’s a huge hit for the bottom line,” Chagares said.

Amazon has worked to improve its return service with more logical packaging and usage of FedEx mailboxes or its own Amazon lockers, but it is not the boundary-pushing efficiency that Amazon Prime and Amazon Fresh look to be. For companies with shallower pockets, Amazon-style fixes are not even feasible.

“Some retailers today are telling consumers just to keep products, and they’ll give them a credit,” Chagares said.

Industries constantly look to innovate as a way to stay ahead of competition, and such advancements can often happen at light speed in e-commerce thanks to Amazon’s war chest and everyone else’s desire to keep up. Eventually, such innovation will yield returns — but not so far.

Bohler Engineering principal Mike Jeitner, CBRE Vice Chairman Michael Hines, High Street Realty Co. CEO Bob Chagares and J.G. Petrucci Co. Executive Vice President Peter Polt

“E-commerce companies are still trying to figure this thing out,” CBRE Vice Chairman Michael Hines said. “They don’t know what’s going on.”

Some are already attempting to tackle the issue. According to Chagares, several companies currently share a 100K SF returns center in the greater Philadelphia area that started out as a way to mitigate losses, but soon became a profit center because of the sheer number of products that could be quickly fixed or resold at a much better price.

Last-mile facilities are not getting built as quickly as demand seems to warrant because land in key locations is so difficult to come by, but return centers would take up even less space and require fewer purpose-built facilities.

“The type of space that’s necessary for this is only horizontal, rather than big cubes,” Chagares said. “So old [facilities] with 18- [to] 22-foot clearance in cities, which is where you’d want these centers, could be very viable.”

Just as some in the industry are looking at shuttered big-box stores or shopping malls as potential targets for conversion into distribution centers, others are wondering about melding retail real estate to industrial to facilitate the returns process.

“Close neighborhood retail is doing better, and utilization of those spaces for returns could do well,” Dermody Properties partner Gene Preston said.

At this point, the demand for distribution centers of all types remains strong, with cautious lending and scarcity of space and labor providing impediments to meeting it all at once. It is a healthy trend for the industry, but that does not stop anybody from looking ahead to the next slowdown, and by then, return facilities might be a better investment.

“Retailers look at it as a failed sale, but when the music slows down and the economy slows down, we think we’ll see people knocking on our doors for facilities like this,” Chagares said.