About 400 million square feet will be needed over the next five years to manage the expected surge in demand to process online returns, according to a report to be released Tuesday by real estate services giant CBRE Inc. (NYSE:CBRE).
Most of the square footage to handle returns will come from older distribution centers which third-party logistics (3PL) providers and large retailers will vacate for newer facilities to support forward logistics operations, CBRE said.
About 1.5 billion square feet of new logistics square footage will be delivered by the end of 2025, CBRE said.
As of April, there was 10 billion square feet of industrial space dedicated to warehousing and distribution, according to data from research firm Statista. That number is very likely to rise as of year’s end due to the surge in e-commerce demand that has resulted from the COVID-19 pandemic.
Shoppers’ reluctance to buy holiday goods in person due to the pandemic will result in a record-shattering season for e-commerce sales and returns. Holiday e-commerce sales will hit $235 billion, a 40% increase over 2019, which itself was a record year, according to CBRE. The value of e-commerce returns will reach at least $70.5 billion this holiday, a 73% increase from the average annual totals over the past five years, said Optoro, a reverse logistics provider.
Despite the expected surge in returns, the reverse supply chain should have enough transportation and warehouse capacity to effectively manage the process, CBRE said. Companies have done a solid job in procuring spot truck and warehouse capacity for forward moves, company executives said. Once Christmas comes and goes, there should be enough physical resources to handle the returns volumes, executives said.
Historically, about 30% of e-commerce orders are returned in one form or another, a ratio that spikes during the holidays, Optoro said. By contrast, about 8% to 10% of orders placed year-round in stores are returned, Optoro said.
The higher ratio of online returns is due in part to the ease and convenience of returning goods from one’s home. In addition, the inability to see and touch an item before buying it often leads to online buyer’s remorse as the product that arrives can be the incorrect size or color, and sometimes the wrong product.
Retailers and manufacturers are in a tough spot when it comes to managing returns. Reverse logistics costs, which consist of transportation, processing, discount loss and liquidation loss, and customer support, can conservatively amount to 59% of the sale price of a $50 item, Optoro said. Yet a seamless returns process has become a top priority among online consumers. According to an Optoro survey, 42% of consumers would not use a retailer again if they suffer what they consider to be a poor returns experience. At the same time, more than 90% of respondents said that a positive experience would persuade them to use the retailer again.
A reverse logistics supply chain requires an average of up to 20% more space and labor capacity than forward logistics, Optoro said. Second-generation space is preferred over more modern Class A facilities. Class B buildings typically have lower ceiling heights because reverse activities are high-touch in nature, Optoro said. In addition, the varying size of the pallet loads makes them difficult to stack or safely store in high racks, it said.
Reverse logistics and inventory control are also contributing to increased size requirements for warehousing. In the third quarter, the average size of warehouse leases of more than 100,000 square feet hit a record high of 272,000 square feet, CBRE said.