Third quarter 2007 compared to third quarter 2006:

E-commerce estimates increased 19.3 percent (±2.6%) from the third quarter of 2006 while total retail sales increased 3.8 percent (±0.5%) in the same period.

E-commerce sales in the third quarter of 2007 accounted for 3.4 percent of total sales (estimated at approximately $5 trillion). That’s up from zero ten years ago.

E-commerce retail sales have been increasing their unstoppable takeover of traditional retail sales in consistent increments of 0.2 percent every quarter (see Figure 2). This happened because of increased consumer satisfaction through improved security, delivery and product by e-commerce websites. The retail stores have seen the future, and they have developed their own websites. This only further validates the continuing growth of e-commerce and the demise of the retail store by cannibalizing their own store sales.

Figure 2

The financial impact on commercial real estate from the record prices at the pump is not coming tomorrow – changes are already taking place. The International Council of Shopping Centers’ U.S. chain store sales index was up just 1.6% in October, the weakest result since 1995. What’s more, according to Thomson Financial, two-thirds of the nation’s largest retailers missed sales estimates for the month.

Residential and office properties are not exempt from these consumer changes. The quality and financial obligations of the property’s lessee(s) are what determine their value. Prospective lessees will be paying more attention to distance; access to highways; and public transportation to jobs, shopping, education and entertainment. These factors will play an increasing role in determining commercial real estate value (see Figure 3).

Figure 3

Conclusion

The arrival of new record oil prices is going to jump start and accelerate e-commerce’s retail growth. The fourth quarter 2007 estimates to be released by the Census Bureau of the Department of Commerce on February 15, 2008 will show this jump and mark the official beginning of the end of retail business as we know it. Office buildings will continue to reallocate their space usage because more employees will be working at home. Residential housing will need to provide a more integrated resident support system. Commute distance will continue to factor heavily in the value equation.

The phrase efficient distance cannot be emphasized enough. Commercial real estate is not like other operating businesses when it comes to location. It can’t be moved to a more convenient location. Thus, the need for responsive, comprehensive due diligence is no longer an option. Future markets will not bail out poorly located income properties purchased with inadequate due diligence.

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