Once seen as unstoppable, e-commerce may be hitting its limit with physical retail real estate making a quiet comeback, says Chris Bedingfield, portfolio manager at Quay Global Investors.

“During and in the aftermath of the COVID lockdowns it seemed e-commerce would devour the world, especially physical retailers. The rise in e-commerce benefited real estate assets like industrials from the over leasing and over development needed to support the demand. However four years on, and a new trend is emerging with a shift from online back to physical retail,” he says.

Online retail sales penetration appears to be peaking in Australia at or around 12 per cent of total retail sales, as the chart below shows.

This trend is not just local, says Mr Bedingfield. In the US, e-commerce’s share of retail sales peaked at 16.3 per cent in April 2020 and appears to be plateauing at this level.

“The implications of this shift for real estate are profound and two-fold. Firstly, the outlook for a reacceleration of industrial development and increase in demand for such real estate isn’t looking positive. At the same time, the fear and risks around physical retail, like shopping centres, continues to abate,” he says.

“When it comes to e-commerce, we believe that what was once a secular growth industry could now be morphing into a traditional cyclical industry. This is creating a real headwind for industrial assets.”

Investor confidence in both the direct and listed retail real estate markets is growing, and Mr Bedingfield says that the lack of any new recent supply of retail space should increase leasing tension as tenants look to stores as a new avenue for growth.

“We are already seeing some evidence of this with the transaction market beginning to thaw both in the US and in Australia. For example, Scentre Group recently announced a 25 per cent sale of Chermside Shopping Centre. This is the first sale for the group since 2019.”

Demand for additional warehouse space is also projected to once again decline in 2026, reflecting broader recognition that e-commerce share is reaching its peak.

“One of the largest e-commence tenants, Amazon, does not appear to be in growth mode. For industrial landlords, this is problematic. Unlike in previous years, Amazon’s future warehouse needs will be almost entirely self-built, with minimal third-party leasing. As the company continues to take market share from other e-commerce and third-part logistics providers there will be no positive offset from other sectors in terms of new leasing demand.

“This all suggests this is more than just a whipsaw adjustment,” says Mr Bedingfield.