This blog post draws on research Aquicore conducted for its 2017 whitepaper CRE Tech Horizons: Infrastructure.
The technology for successful drone delivery is already here. Let that sink in for a minute. It may be a few years until you can open your door to find your Whole Foods groceries parachuting onto your lawn in Amazon boxes like organic, all-natural artillery fire, but make no mistake: That day is coming.
When it arrives, most experts believe that it will have important consequences for the way that we make purchases in the same way that the internet had consequences. For a taste of those, consider the devastating effects that online retail has had on malls and their traditional anchor tenants. By March of this year, more than 1,500 store closures had been announced by the likes of Macy’s, Sears, JCPenny, and Abercrombie & Fitch, among others. As a result, a third to one-half of malls across America, most of them in rural areas, are in danger of being shuttered if they aren’t able to reinvent themselves.
It isn’t all gloom and doom in the commercial real estate industry; many malls have been able to adjust to the new economy, and those that can’t often sit on land or in buildings that are perfect for redevelopment into more profitable ventures. The key has been understanding the types of tenant that are resistant to digital competition and a stronger focus on targeting local demographics. The days when a cookie cutter mall could be thrown up anywhere in the country and find profits are over.
Mass deployment of drone delivery is likely to exacerbate these existing trends, but at the same time, it could well create new markets and types of tenant. Before the drones are upon us, let’s take a look at both effects.
The share of total U.S. retail made up by e-commerce is still a relatively small 8.5 percent in the first quarter of 2017. That number is growing rapidly, however; e-commerce grew 14.7 percent year-over-year compared to the 5.1 percent that all retail sales grew over the same period. If the trend holds – and it has been remarkably steady – it will cross the 10 percent mark about halfway through 2018.
Amazon is leading the transition to online shopping, and it’s striking just how much market share the company has managed to accrue. Analysis by Slice Intelligence earlier this year found that Amazon accounted for 43 percent of all online retail in the U.S. Even more telling, it accounted for 53 percent of e-commerce growth, meaning that it is growing even larger as time goes on.
One of the most important pillars of Amazon’s success has been its ability to get customers their goods quickly, thus reducing brick-and-mortar’s advantage. Sixty-four percent of U.S. households are members of Prime, Amazon’s subscription service that offers free two-day shipping, according to speakers at the Internet Retailers Conference and Exhibition, and while there are other reasons why customers might sign up for Prime, this gives an idea of just how important speed is to American consumers.
It’s no accident, then, that Amazon is at the forefront of drone delivery. The corporate giant is registering patents on almost every aspect of the technology, including a drone with adjustable arms and a winch, parachute shipping labels, and a floating blimp warehouse with drones that drop like stones with your merchandise and engage their rotors shortly before hitting the ground to save energy.
Amazon and other organizations working on the problem clearly understand that shorter delivery times mean that even larger shares of retail can move online. When this happens, in-person retail will likely collapse even further. This could lead to lower rents for retail-focused commercial real estate in some areas. However, it’s worth noting that property owners who have successfully retargeted their holdings to cater to the new economy by bringing on tenants in sectors like entertainment, restaurant, or other experiential retail, have seen higher rents. Sometimes much higher.
Hello last-mile distribution
On the other side of the coin, drone delivery may create a need for specialized warehousing to enable last-mile distribution. Drones have a limited range – Amazon’s can fly about 15 miles with a pair of soccer shoes – so any company that wants to make drone delivery ubiquitous will need pretty broad coverage across America. Walmart is actually in a good place to begin with, considering that about 70 percent of the country lives within 5 miles of one of their stores. Amazon will need to start signing leases if it wants to get its products within 7.5 miles of a large number of its customers.
These distribution warehouses might be fairly similar from the street, but no one is quite sure what their needs will look like on the roof. Some drones can take off and land vertically, like helicopters, but others require a little bit more infrastructure. In Rwanda, the medical delivery startup Zipline uses drones that launch with a sort of giant slingshot and land on inflatable pads.
Another thing to think about is the package receiving infrastructure. It will almost certainly be preferable to keep drones and people separate, so deliveries to the front door are out. Commercial and residential buildings, especially in cities, may have to include drone ports on their roofs to handle the new delivery method. Again, no one is certain what this will look like yet, and the industry is still exploring different methods.
Finally, there is the issue of airspace. Nixon Peabody real estate partner Justin Thompson told Aquicore that airspace rights are likely to be one of the trickiest roadblocks to mass commercial drone deployment. Homeowners generally own the rights to the airspace about 400 feet above their properties, after which the space is reserved for aircraft. If drones are going to be flying above homes on their delivery routes and not just above roads – and otherwise, what’s the point? – homeowners will either need to consent to companies using their airspace or it will have to be taken through eminent domain.
“One solution that I can see that’ll probably get implemented in one form or another is people giving easements over their airspace or conveying their airspace to the organizations that are benefiting from drone delivery,” said Thompson. So … now you’re talking about putting together an air highway of sorts through which drones are allowed to pass, and that could be cobbled together the way the road systems are in most cities: over a period of years through eminent domain, through private easements, and through the right to travel through the airways above public streets.”
If the low airspace above homes and buildings becomes a tradeable asset, markets may emerge as a result of drone deployment.
There are several regulatory hurdles that will need to be cleared before drones are delivering your socks, but BI Intelligence predicts that the first commercial deliveries will be made in 2020, with expansion happening in 2021. Some aspects of commercial real estate may find diminished demand, but others might thrive in the new market and new markets could even emerge.
Interested in learning more? CRE Tech Horizons: Infrastructure dives even deeper into drone delivery, considers how the blockchain will affect commercial real estate operations and transactions, and looks at the effect that self-driving cars will have on the way our cities are organized.