Despite headwinds from supply chain disruptions and a resurgence of Covid-19, U.S. retail sales between November 1 and December 24 were up 8.5% compared to 2020 according to preliminary data from Mastercard. With the holiday shopping rush now behind us, the biggest logistics challenge of the season is only just beginning. Referred to as reverse logistics, the messy return and repair process accounts for 10% of total supply chain costs. Two-thirds of consumers are expected to send back at least one gift and the overall return rate for retail purchases averages 10.6%. The e-commerce return rate is almost twice as high, averaging 18.1%. Record retail sales, including a growing share of online purchases, means that more returns than ever will be flooding warehouses in the coming weeks.

Worker shortages and historically low industrial vacancy only add to the difficulties of reverse logistics, which is both labor and space intensive. Most returned merchandise ends up in a distribution center—the reverse warehouse—where it must be inspected and sorted manually. Returns operations involve many touches, making them disruptive and necessitating separation from forward logistics. This requires accommodation within a specific area of a warehouse or in a standalone specialized facility. Returns can also be contracted to a third-party logistics provider or can be processed in co-warehousing space on a short-term basis, since typical space demand is highly seasonal.

OCCUPIER CONSIDERATIONS FOR REVERSE WAREHOUSES

• Location near the rooftops – Sites in proximity to consumer households and retail stores are desirable for reverse logistics to keep transportation costs low. Distances to specialized infrastructure, such as recycling centers, are also important.
• Larger, flexible footprints – Compared to forward logistics, reverse logistics requires 20% more warehouse space. Demand is also often seasonal, with retailers needing extra space at peak periods.
• Second generation space sufficient – A state-of-the-art distribution center is not typically needed for returns processing. With more manual labor and less racking and automation required, lower clear heights and less efficient layouts are often adequate and can be leased at lower rents.

Second generation space represents the bulk of the inventory in the tightest industrial markets in North America, including Northern New Jersey and Los Angeles, where it represents more than 50% of the space inventory. The rent discount to newer construction can be steep, equating to 33% in the Inland Empire and 25% in Seattle, offering significant value options. In addition to second generation warehouse space, manufacturing buildings as well as converted retail stores present opportunities for reverse logistics.

Given this year’s record retail sales and global shipping crisis, a proactive real estate strategy is more important than ever to ensure a smooth and efficient returns operation.

Sources: Savills Research, U.S. Census, National Retail Federation, Reverse Logistics Association, Deloitte, Doddle, Optoro, Mastercard

Opinions expressed by the author are their own.