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Leasing Considerations Landlords Should Keep in Mind When Their Properties Serve as Delivery Pick-Up Points

Property owners should as pick-up point operators to maintain high limits of commercial general liability insurance, among other things.

We live in an exciting time of change in the consumer retail market. As technology continues to advance and as consumers get more comfortable with making the majority of their purchases on online, companies are forced to streamline their supply chains in order to compete with the on-demand delivery expectations of consumers.

A recent UBS report shows that e-commerce represents 16 percent of total retail sales (excluding food and gas), up from 8 percent in 2004. It is projected that between 30,000 and 80,000 brick-and-mortar stores will close as e-commerce continues to garner a larger share of retail sales, expected to be up to 25 percent in 2025. With companies like Amazon and Walmart offering free two-day-shipping, customers have become accustomed to finding an item online, clicking “buy” and having the item delivered within 48 hours, or sooner. While most consumers still look for free or low-cost delivery options, they also expect the option of one-day or same-day delivery, and in many cases are willing to pay a premium for that convenience.

Today, this delivery timeline continues to shrink. Customers are now demanding even one- to three-hour shipping. Demand for fast delivery presents a unique problem for e-commerce businesses called the “last mile problem.”

The “last mile problem”

The crux of the “last mile problem” is that most supply chains are not set up to accommodate this two-day shipping structure, where items are bought online, shipped to a regional distribution center, and then loaded on a truck to be delivered to the customer’s own home. The “last mile” is the point from the regional distribution center to the customer’s home. This stretch accounts for a disproportionate amount of time and cost relative to the rest of the supply chain. In fact, research shows that 28 percent of the total delivery cost of goods comes from the “last mile.”

In order to combat this problem, retailers and third-party logistic firms (“3PLs”) are putting more locations closer to their customers than ever before. That proximity to the customer is the overwhelming priority, in many cases superseding what may be expected in terms of the cost of commercial real estate. Amazon, UPS, DHL, FedEx and other 3PLs need to be where they can quickly meet customer delivery expectations, and they will likely pay a premium to accomplish it.

Further, large retailers such as Target, Walmart and Home Depot are increasingly offering in-store pick-up of online purchases to lower delivery costs and drive in-store traffic. This buy-online-pickup-in-store (“BOPIS”) trend significantly cuts down on delivery time to those consumers willing to drive a short(er) distance to pick up their package. Amazon and UPS are reportedly experimenting with drone delivery, where the goal is to deliver a package to the consumer’s home in under 30 minutes from ordering online. Additional approaches include delivery to the trunks of cars, micro-warehousing and parcel lockers (as a parallel, think “bike racks”).

Recently, localized pick-up points using local brick-and-mortar locations are springing up, where consumers can go into a store, retrieve their package stored in a locker and take it home in their own vehicles. For example, Fed-Ex and Walmart have partnered to provide pick-up points for Fed-Ex in Walmart stores. Other companies, like Amazon and UPS, have been experimenting with package pick-up points in smaller, more localized stores such as neighborhood pharmacies and convenience stores. These pick-up points have already seen widespread use in Europe, where self-service delivery pick-up points are extremely popular as home delivery is difficult and many live in population-dense areas.

Localized pick-up points

The challenge is to find a building to store packages in a location that can reduce the user’s delivery time while keeping the overall supply chain costs low. To accomplish this, the user must find the correct size building, with adequate employee and truck parking, zoned for the user’s use, in close proximity to a dense population with the right demographics (typically millennials with disposable income who make a significant number of online purchases) and close to a highway network that can provide easy truck access, without heavy traffic congestion and high tolls.

Another challenge can include leasing restrictions by landlords banning pick-up-points on their property to protect big-box stores or the interests of other tenants. This issue involves a tenant exercising a use restriction that it negotiated in the lease against another tenant’s use. An example of this has been playing out recently in a clash between retail giants Target and Amazon. Amazon’s acquisition of grocery chain Whole Foods facilitated the company’s strategy to use the many physical Whole Foods locations to help deliver products. Target, one of the companies most threatened by Amazon’s strategy, is using its status as an anchor tenant in a San Francisco mall to restrict Amazon’s use of the Whole Foods location. Specifically, Target is exercising these use restrictions to prevent Amazon Lockers, Amazon’s package pick-up-points, from being implemented in the Whole Foods store. Other companies, like Best Buy, are invoking similar legal rights against Amazon’s use of their newly acquired Whole Foods locations to prevent them from selling Amazon electronics like the Echo or Kindle in store. These issues are less likely to arise, however, when the pick-up points are located in smaller, more localized buildings with less institutional control.

Leasing considerations

Pick-up points can change the nature of a property as its use is expanded. Leasing should be adjusted for these buildings housing pick-up-points as property owners should be aware of the following:

  1. The building will suffer heavy wear and tear due to the great volume of product moving through the building and the high number of employees required to operate the facility. Therefore, the owner should obligate the tenant to be responsible for all repairs and maintenance of the building during the term of the lease.
  2. The owner should require the tenant to provide a large security deposit or should require a corporate guaranty from a credit entity so that the owner will have recourse if the tenant defaults under the lease, including if the tenant fails to maintain the facility.
  3. The tenant should be required to maintain relatively high limits of commercial general liability insurance since the operation of a last mile warehouse is very labor intensive and high volumes of product will move through the facility increasing the potential for insurance claims.
  4. The owner should insist on using its lease form to adequately protect the owner and its property.

Insurance provisions in leases are also implicated. This is especially true where these pick-up points are located in buildings that may not have anticipated the extra traffic from consumers. Thus, landlords need to be sure that their insurance coverage covers the additional, increased use of the property. Further, the use of property like local strip malls that are either abandoned or underperforming could create unique zoning issues. These issues could include the property not being zoned for warehouse use, increased traffic congestion or a danger to the neighborhood. Therefore, property owners must be aware of the applicable zoning regulations that the property is subject to and seek appropriate variances if necessary.

Conclusion

The rise of e-commerce has disrupted traditional supply chain management. Customers want to receive their online purchases as soon as possible and are willing to pay a premium for that service. Companies faced with the “last mile problem” are constantly looking for ways to reduce costs and delivery time to their customers. Localized pick-up-points allow companies to reduce their costs and delivery times and allow customers to pick up their online orders quickly with minimal effort. This trend dictates that more localized pick-up-points will begin to pop up in population-dense cities. Landlords and property owners should be aware, however, of the potential legal considerations of these pick-up-points and these considerations should be reflected in the leasing, zoning and insurance of the property.

Steven P. Katkov is a member in the real estate practice group of law firm Cozen O’Connor. He represents buyers and sellers in commercial real estate transactions, lenders and borrowers in commercial loan transactions, and tenants and landlords in leasing transactions.

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