Occasionally a company exerts such a profound and widespread gravitational pull on society that our language bends to accommodate it. Amazon is among those companies. We no longer search online for facts. We “Google” them. Similarly, at this time of the year, especially, we no longer talk about the impact of e-commerce on the world, but about “Amazonification”.

Amazonification is the number-one industry trend for real estate investors. It touches parts of the sector that you might never imagine. Amazon Web Services, the firm’s cloud-computing provider, is one of the world’s largest users of datacenters. Even offices and residential apartments feel its mass. It is the largest employer in Seattle, where it has its global headquarters, occupying almost one-fifth of the city’s office space. As it proposes a second HQ elsewhere in the U.S., major cities compete for those jobs and their office and residential markets respond as a consequence.

Of course, the biggest impact of Amazonification is being felt in the retail supply chain. That impact is more nuanced than many assume, however.

The End of Bricks-and-Mortar? Far from It!

Global online sales doubled to more than $2 trillion in the five years to 2016. They are forecast to double again by 2020, and still only take a 15% market share, according to e-Marketer and Prologis Research.

Behind this growth are the twin forces of the emerging world coming online and the shopping habits of Millennials. A CBRE survey published in 2017, Millennials: Myths and Realities, found young people in the U.K. leading the pack, on course to do more than half of their non-food shopping online by 2019. But the rest of the world’s 20- and 30-somethings are not far behind.

Figure 1. Global Online Sales

Source: e-Marketer, Prologis.

We often hear that online shopping means “the end of bricks-and-mortar on the high street.” Nothing could be further from the truth.

Consumers are increasingly demanding same-day and even same-hour delivery of goods. That is taking us from a distribution model in which a single retail outlet with storage space receives a delivery once or twice a week to a model in which thousands of consumers receive deliveries several times a week or even several times a day.

The resulting “e-fulfilment” is very real estate-intensive. It utilizes a range of assets, from multistorey warehouses, through regional infill service centers geared to fast processing of orders, to local self-service locker and pick-up locations. Wider product choice, smaller orders and increased incidence of product returns mean that e-commerce also uses more of those assets than traditional retail. In 2016 Prologis calculated that each square foot of logistics real estate worldwide supports just $750 – $1,000 of online sales, as opposed to more than $2,200 of traditional bricks-and-mortar retail sales. It estimated that e-commerce generated 20% of all new leasing, up from 5% in 2011.

Figure 2. E-commerce Uses More Bricks and Mortar Than Traditional Retail

Source: Prologis. Data as at September 2016.

A-Grade Retail Redefined

Logistics is the clear real-estate growth opportunity in e-commerce. But investors should not neglect the value opportunity.

That value opportunity has arisen due to a somewhat indiscriminate de-rating of retail assets as investors have become more cognizant of the Amazonification trend. There are three reasons why we believe it will pay to be more discriminating in this sector.

First, the extent of Amazonification varies regionally. There are no territories in which online sales are predicted to lose market share, but some are starting from a lower base than others and some are forecast to transition more slowly. That can be due to local shopping culture or a simple lack of supporting infrastructure.

Elsewhere, e-commerce has much more room to grow without having the same brutal impact on retail malls that we expect across much of North America simply because these territories have substantially less retail space per capita to begin with. Some of the biggest online shoppers are found in the U.K. and Germany, for example, but the latter market has just one-tenth of the retail space of the U.S. Even a country such as Australia, which has plenty of space for retail malls, has restricted growth with a relatively tight planning regime.

Figure 3. Territories Outside North America Have Much Less Retail Space at Risk From E-commerce

Source: ICSC Research. Data as at 2013

In these cases, we might expect e-commerce logistics real estate to command a premium, but also greater utilization of existing traditional retail assets within the e-commerce supply chain, and more focus on non-apparel outlets that are less at-risk from the e-commerce trend. That is precisely what we see in Australian and Asian malls, in particular. Rather than anticipating that the brutal mall cutbacks of North America will spread to other territories, we think the established trends in other territories will spread to North America—and these are the second and third reasons to be more discriminating in the retail sector.

Even in the over-supplied U.S., we believe that traditional stores and malls that enjoy prime locations are likely to benefit from Amazonification as they double as pick-up a points for goods bought online. Around a fifth of customers in the Americas and Asia Pacific prefer in-store delivery over home, office or other third-party pick-up points, according to CBRE research from Q4 2016. A higher proportion of goods bought online are returned, too, and customers often like taking their purchases back to a real person in a local store if they have the option.

This helps explain why retailers that are slowing their physical store openings remain committed to the top locations, but also why many leading U.S. online brands—such as Warby Parker, Bonobos, Amazon Books, Toms and JustFab/Fabletics—have been opening bricks-andmortar stores in these “A”-grade shopping malls.

Figure 4. Some Retail Assets Will Withstand Amazonification Better Than Others

The hierarchy of e-commerce risk to U.S. shopping malls…

… has been reflected in realized revenues over the past seven years

Source: Green Street Advisors. The chart shows realized annual revenue per available square foot (RevPAF), indexed to 100 in 2007. High Productivity malls typically have tenants whose sales are in excess $500 per square foot, while Low Productivity malls have average tenant sales of below $500 per square foot.

The best-located malls are also the ones ablest to adapt their retail offering to the pressures of Amazonification. If you own the primary mall at the heart of a large and thriving community, you are much more likely to be able to exchange the apparel stores that are most at risk from online shopping for grocery stores (a bricks-and-mortar sector that Amazon has moved into rather than trying to supplant), restaurants, bars, gyms, wellness facilities, cinemas and the other entertainment offerings that are becoming the new source of demand for A-grade retail space. This is the third reason to discriminate properly in retail real estate.

New Opportunities for the Winners

We take reassurance from the fact that there are other sophisticated investors who recognize that the shares of these A-grade mall landlord groups are trading at material discounts to their underlying net asset values, and that those assets are attractive. A number of activist investors have taken meaningful positions in U.S. mall REITs, and we have also seen a bid to acquire a 100% stake in a large U.S. mall REIT. Europe has also just seen two major mall mergers proposed, signaling an appetite within the industry to consolidate these assets.

This interest reflects the fact that, while the Amazonification of retail worldwide is creating a notable growth opportunity in logistics real estate, it is also sharply delineating the winners and losers in retail real estate itself, and giving the winners exciting new opportunities to redefine what they do. The weaker locations in the retail pack will continue to get mauled by e-commerce, but the best locations in the sector, far from being devoured, can benefit from this strengthening trend.