Rapidly changing customer expectations are making a profound impact on warehouse development.

In a telling twist of retail fate, an empty shopping mall in Euclid, Ohio, is re-emerging as an Amazon fulfillment center.¹ It’s just one more way e-commerce is changing the face of retail—and of retail real estate.

Online transactions represent 11% of total retail sales,² but the channel has grown three times faster than traditional brick-and-mortar sales since 2010.³ That growth comes at the expense of traditional shops, contributing to store closings, competitive consolidations, and even the shuttering of entire malls like the one in Euclid. After undermining America’s malls, Amazon is now absorbing them into its supply chain.

The change goes beyond repurposing old properties. It’s part of a fundamental evolution in industrial real estate that has crucial implications for industrial real estate developers and tenants.

The Transformation of an Entire Supply Chain

Deloitte forecasts demand for an additional 850 million square feet of industrial real estate in the U.S. through 2023, driven in large part by growth in e-commerce.⁴ Online retailers need three times the distribution real estate, including warehousing and fulfillment centers, as brick-and-mortar retailers do.⁵ And today’s retailers don’t just need more space—they also have different requirements to fulfill their needs.

For example, highway access and price were once the primary criteria for choosing a warehouse site. The list of considerations has grown, due to aging transportation infrastructure, tighter fulfillment timelines, and a global marketplace. Today’s warehouses must include access to:⁶

• Well-maintained transportation infrastructure
• Intermodal transportation hubs, including rail, ports, and airports, for access to long-distance and overseas shipping
• Competitive utility costs and grid dependability
• Ease of access to a target metropolitan area
• A quality workforce

Amazon is leading the pack of quick shippers serving “need it now” consumers. The company’s adaptive reuse of malls is just one example of this trend. Since construction of smaller warehouses has lagged for several decades, rents have risen twice as fast as in the larger warehouse market.⁷

Enter shuttered malls as a solution: These large-footprint properties are often located within city limits and closer to consumers—key factors in getting product to them more quickly. Mall conversion is the transition point between the steady decline of storefront retailers and the growing need for distribution support. By some estimates, fulfillment centers will eventually replace one-third of the nation’s malls.⁶

New Landscape, New Warehousing Needs

A major benefit of adaptive reuse is that the spaces can be tailored to meet the new needs of the online retailing industry, including the need to:

• Process and ship high volumes of items quickly
• Make space for low-volume, high-value items
• Handle more reverse logistics: merchandise-return rates are two to three times higher with e-tail than with brick-and-mortar transactions⁸

These factors have already influenced warehouse properties, which are now taller (by an average of 3.7 feet of clearance height) and 143% bigger by square footage, on average, than they were just a decade ago.³ Additionally, multi-tenant warehousing solutions⁹ and even cost-effective tent warehouses, such as the ones Amazon is testing in Memphis, Tennessee,⁶ are helping to ease unmet demand.

Looking Ahead

Developers and tenants must adapt to the changing landscape. That may demand updates to design specifications in site selection and investment analyses. It may also involve research into adaptive reuse zoning ordinances in prospective cities to gauge potential for future mall conversions.

Increasingly, consumers are likely to buy everything from dog food to lampshades from the comfort of their homes—so commercial real estate professionals can expect the supply chain to continue its rapid evolution.

Learn More

M&T offers commercial loans for construction, permanent, government-assisted or secondary-market mortgage financing. Talk to your commercial banking specialist about how you can prepare for the shifting trends in industrial real estate. Call the M&T Commercial Service Team at 1-800-724-2240.

Sources:

¹ “From dead mall to Amazon warehouse: Here’s how shuttered retail stores are getting a new life” CNBC. January 2019. https://www.cnbc.com/2019/01/30/from-toys-r-us-to-tk-heres-how-shuttered-stores-are-getting-a-new-life.html

² US Census Bureau data. Quarterly E-Commerce Report. November 2019. Adjusted sales time series. https://www2.census.gov/retail/releases/historical/ecomm/19q3.pdf

³ “How Has E-commerce Shaped Industrial Real Estate Demand?” CBRE 2018. http://www.cbre.us/real-estate-services/real-estate-industries/omnichannel/the-definitive-guide-to-omnichannel-real-estate/real-estate-impact/how-has-e-commerce-shaped-industrial-real-estate-demand

⁴ “The Future of the Industrial Real Estate Market” Deloitte. May 2019. https://www2.deloitte.com/us/en/insights/industry/financial-services/future-of-industrial-real-estate-market.html#endnote-sup-8

⁵ “Global E-Commerce Impact on Logistics Real Estate” Prologis. September 2016. https://www.prologis.com/logistics-industry-research/global-e-commerce-impact-logistics-real-estate

⁶ “Long May You Run: An Essential Commercial Real Estate Tuneup” 2019. CCIM Institute. https://www.ccim.com/commercial-real-estate-insights-report/long-may-you-run-an-essential-commercial-real-estate-tuneup/?gmSsoPc=1

⁷ “U.S. Market Flash. Bigger Not Always Better: The Case for Light Industrial” CBRE 2019. https://www.cbre.com/research-and-reports/US-MarketFlash-Bigger-Not-Always-Better-The-Case-for-Light-Industrial?utm_source=National%20Media&utm_medium=National%20News%20release&utm_campaign=Light%20Industrial%20MarketFlash

⁸ “E-commerce returns provide growth opportunities for industrial real estate developers,” Patricia Kirk, National Real Estate Investor, January 15, 2019. https://www.nreionline.com/industrial/e-commerce-returns-provide-growth-opportunities-industrial-real-estate-developers

⁹ “Innovations in Commercial Real Estate: Preparing for the city of the future” Deloitte 2016. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Real%20Estate/us-innovations-in-commercial-real-estate.pdf