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CRE Finance World, Winter 2014

Industrial Real Estate and E-Commerce: The Evolution of Warehouse/Distribution Space “Essentially, e-commerce has cut the retail center out of the equation. In effect, warehouse and distribution centers have evolved into retail/industrial hybrids.” A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 41 Figure 4 Effective Revenue Per Square Foot, Percent Change 2012Q3-2013Q3 Source: Reis, Inc. What Does this Trend Mean for Investors and Developers? From an investment standpoint, the emergence of big box centers will most benefit those institutions and firms with access to large amounts of capital. Due to the size of these new warehouse and distribution centers, with many now topping the 1,000,000 sf mark, large investors will be best equipped to take advantage of the strong demand for the property type. This trend is already underway as huge asset managers like Blackstone and Brookfield and REITs like Prologis have been the major players in the property segment in recent quarters. The trend toward larger, more technologically advanced space will be a boon for developers. Even though the vacancy rate for warehouse and distribution centers remains elevated at 11.7%, a large portion of the space left vacant is not logistically viable for most e-commerce companies. To keep up with the fast growing e-commerce industry, developers will need to be active. This is already underway as developers see fundamentals improving and the market for big box space tightening. Local brokers in metros across the country are emphasizing the lack of viable space for the largest users on the market. Given the capital costs of upgrading and expanding older, smaller properties, many firms are already looking toward built-to-suit options to satisfy their rapidly evolving needs. The tightness in these highly sought after markets will not last long before developers try to capitalize. The Future of Distribution Space Looks Bright, But What About Retail? We must emphasize, however, that the traditional storefront shopping experience is not going extinct. There is still much room for growth in e-commerce, but brick and mortar retail will survive. Shopping center owners will have to shift their tenant mix to include more service oriented stores, but traditional retailers will remain in the mix as well. Apparel retailers will always retain the advantage of allowing shoppers a place to try on their clothes as well as return and exchange items with relative ease. And already, many firms are looking at how to leverage their existing storefronts in combination with online retailing to better enhance the overall shopping experience. The hot word in retail is “omni-channel retailing,” or the integration of online, mobile and in-store shopping. No one has yet to master the concept, but the goal is certainly enviable. And who is to say that some new technology or innovation will not come along and either revitalize brick and mortar retail or completely alter the current concept of e-commerce as we know it? The development of internet retailing has left a lot of creative destruction in its wake. Firms such as Circuit City and Borders can attest to that. But where it has spelled the death knell of certain industry segments, firms and properties, it has opened up new opportunities in areas such as the warehouse and distribution sector.


CRE Finance World, Winter 2014
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