Delivery times for e-commerce have become much shorter over the past decade or so. While it used to take a week or more to receive items and shipping was rarely free, both of those consumer pain points have improved dramatically. Free two-day shipping is now the industry standard among larger companies that sell products online, and one-day and even same-day delivery is becoming more prevalent.
However, ultra-short delivery times aren't very practical with a network of a few large warehouses. But if a retailer can fulfill its orders just a few miles from their customers, it can be cost-effective and practical to get products to customers in just a few hours. And that's where the concept of a microfulfillment center comes into play.
What is a microfulfillment center?
E-commerce retailers are under increasing pressure to get their products to customers' doorsteps as quickly as possible. The problem is that with large fulfillment centers, it can be difficult to move items around the U.S. quickly. This is especially true in large cities, where consumers are increasingly expecting quicker delivery times.
Microfulfillment centers aim to speed up delivery times dramatically. A microfulfillment center is a relatively small facility designed to fill orders much closer to their final destination than possible with a spread-out network of large warehouses. Think of it this way: If an e-commerce retailer can fill orders just a mile or two from a customer's home, delivery times measured in hours become much more practical.
Why does it matter to REIT investors?
The reason the microfulfillment trend matters to real estate investors is where these facilities are located (or could be located). Because of their size, microfulfillment centers can occupy pretty much any unused commercial space. Here are just a few examples where microfulfillment centers could pop up.
Shopping malls are struggling to find their place in the 21st century retail landscape, and microfulfillment centers could help them figure it out. This could end up being an especially popular use of the large spaces formerly occupied by Sears, J.C. Penney (OTCMKTS: JCPNQ), and other department stores. These spaces could be converted to warehouse-like fulfillment spaces relatively easily, and if the trend catches on, it could be a major win for retail REITs, or real estate investment trusts, and their investors.
There are a lot of vacant shopping center storefronts in the U.S., and conversion to fulfillment space could be a win-win for retailers and shopping center landlords.
Do electronics stores, pet stores, and other retail businesses with rather large buildings really need so much square footage anymore? In the future, it's likely we'll see more of these types of retailers convert some of their buildings into fulfillment space.
In a two-day shipping model, it doesn't make sense to construct small warehouses in cities. But when same-day order fulfillment is needed, the economics can be justified.
The Millionacres bottom line
Microfulfillment centers are definitely an interesting type of commercial property and one REIT investors should keep an eye on. This is especially true when it comes to some of the most beaten-down REIT subsectors, like malls and shopping centers, which could benefit tremendously as retailers, grocers, and other businesses gradually embrace the idea of automating the fulfillment process on a smaller scale.