Growing convergence between the retail and distribution sectors could have profound impacts on the commercial real estate industry. As retail and industrial clients adjust to shifts in consumer behavior and the overall economy, CRE professionals will be challenged to change their thinking about how to truly serve their clients. That challenge, however, could also produce innovative real estate products and new opportunities. That’s according to Dustin C. Read, Ph.D./J.D., author of the NAIOP Research Foundation report, “New Places and New Spaces for E-commerce Distribution: Three Strategies Bringing Industrial and Retail Real Estate Closer Together.”
What was the most interesting or significant discovery you made while researching the paper?
Read: It was probably that some of the most important phenomena related to the convergence of industrial and retail real estate were the ones that received the least attention. In the popular press, there has been lots of discussion of the conversion of obsolete retail buildings into distribution facilities. When you really drill down – even though there have been hundreds of articles written on that topic – the number of [these retail-to-distribution conversion] projects that have been successful in the U.S. is relatively small. I was surprised to see when you really start pulling back layers of the onion, there is more talk about it than there is actual execution of those types of projects.
The amalgamation of all the obstacles a developer must overcome to do one of these projects successfully is significant. The project has to be acquired at a relatively low purchase price and have the right access to infrastructure. It must be in a market that has good industrial characteristics and an area where the municipality has given up on the site as a viable retail location and is willing to rezone it for potential distribution. When all those things come together at the same time, there are opportunities for conversion. But often, they don’t all come together.
Another trend you talk about in the white paper is providing distribution services inside of existing, operational retail. What would an owner of a retail center need to do to deliver that service?
Read: We are at an interesting time in the market where we are watching it shift. We think about things like ship-from-store, pickup-at-store or return-to-store as retailer phenomenon and not landlord-driven phenomenon. But as they become more necessary to the success of retailers, you are starting to see retail property owners take a more active role in thinking about how they might design a shopping center in a way that makes those services more convenient for the end user. They might be thinking about how to partner with technology companies and third-party service providers to expand the capability to retailers, so the individual tenants don’t have to come up with those platforms on their own.
There is a great quote in the report about how landlords aren’t used to thinking about their properties in this way. They think of themselves as a provider of space, not as a provider of services that enable retail to operate efficiently in the current market environment. You are starting to see that shift as the market has gotten tighter, retail has become more competitive, and landlords are doing more to try to carve out a competitive advantage.
The paper also presents the idea of a new type of mixed-use development – one that combines retail and industrial. What is your vision of that type of development?
Read: This is another trend that is in its infancy, but we are starting to see it more and more. It comes from a recognition that most industrial users are not things to be feared, like we did in the past. Most of them don’t have significant externalities, such as huge light pollution, noise pollution, or noxious odors. In many cases, modern distribution space works very well alongside retail, multifamily or office components.
There has also been a growing recognition of the benefits of mixed-use development and the synergies that can exist across different product types. Many industrial facilities have a large daytime workforce that has to live somewhere, shop somewhere, go somewhere for lunch. Developing in a way that accommodates that workforce can create good collaboration between industrial and all these other product types that we more traditionally think of in a mixed-use setting. If you expand our thinking about industrial to include light manufacturing, research and development, and other uses beyond distribution, those properties can become even more compatible with retail, office and multifamily in a mixed-use setting.
There’s a passage in the report which says, “It’s no longer appropriate to think about retail and industrial real estate as tangentially related product types that largely compete in separate markets. They are becoming more and more interconnected each day and real estate developers must understand the implications.” What actions would you recommend to real estate professionals who want to understand this trend more and position themselves to be part of it?
Read: We have to really think about what retail and industrial real estate both do. They share the common goal of getting a product to the end consumer as quickly, efficiently and as cost-effectively as you possibly can. It doesn’t matter if we call the building industrial or retail; its end purpose is to create supply chain efficiencies that allow goods to get to the consumers’ hands. We have created these artificial distinctions as to what constitutes retail and industrial whereas there has always been some blurring of the line between those two. Some large real estate services companies have started creating blended working groups that include traditional retail people and traditional supply chain people. Those professionals work together to come up with new solutions for companies.
The whole world of real estate is changing right now. Consumer expectations and company expectations are all in flux. Everybody is trying to adjust to the new normal and we are going to see some creative and innovative product types come out of that.
Download the full report here. NAIOP members are invited to register for a webinar about the “New Places and New Spaces for E-commerce Distribution” report on Sept. 27, 2 p.m. ET, with Dustin C. Read, Ph.D./J.D.
