March 23, 2021

The Impact of Retail-to-Logistics Conversions on CRE

The Impact of Retail-to-Logistics Conversions on CRE

Though the COVID-19 pandemic drove business away from brick-and-mortar retail and caused an e-commerce boom, some retail sectors were already struggling to keep physical stores open. More than 9,000 stores closed in 2019. With many additional retail spaces left empty by pandemic-related consolidations and bankruptcies, the commercial real estate sector has struggled to come up with viable alternatives for these properties.

Some retailers and property owners have begun experimenting with retail-to-logistics property conversions to meet skyrocketing demand for fulfillment space. For example, Amazon recently opened a new fulfillment center in a former New Jersey Sears. The e-commerce giant was also in talks with Simon Property group at the end of 2020 about converting mall-based anchor department stores into distribution hubs.

This trend has been going on for several years, in fact. About 13.8 million square feet of retail space was converted into 15.5 million square feet of industrial space between 2017 and mid-2020, according to CBRE.

Retail-to-Logistics Conversions in 2021 & Beyond

With the bulk of available industrial real estate already occupied, alternative solutions will be required to produce more viable industrial space. With some estimates claiming a need for an additional 1 billion square feet of industrial real estate by 2025, new construction alone won’t be enough. Though retail-to-industrial conversions haven’t gained too much traction to date, the option may become increasingly appealing the longer capacity remains tight. The following factors may influence efforts to pursue retail-to-industrial conversions over the next several years.

Retail Building Infrastructure

While the right space can provide significant cost savings for a retail-to-industrial conversion, converting properties for logistics or manufacturing can often be prohibitively expensive. Many retail buildings simply don’t have strong enough bones to handle extensive loaded racking, machinery, and heavy equipment found in industrial facilities. This simple fact rules out many retail properties for industrial conversion, which will influence the ability of developers to convert large volumes of properties.

Standalone big box retail buildings will present the best opportunity for conversion to fulfillment centers or other industrial needs. While large shopping malls also have potential, such a conversion is expensive and time-consuming, which may put off many developers. Smaller retail space like strip malls will likely continue on in a normal retail capacity, though some of these individual store spaces have potential as dark stores supporting curbside pickup or online orders for omnichannel retailers within the same complex.

Urban Fulfillment

Industrial real estate in major metropolitan environments doesn’t stay empty long, and there never seems to be enough to go around. As residents leave cities and corporations turn to remote work models, retail centers that grew up around busy corporate office hubs remain empty. These retail stores may present a prime opportunity for the fulfillment sector.

Though many retail stores don’t have the right architectural infrastructure for easy conversion to full-scale traditional distribution centers, the logistics sector is nothing if not creative. Even if a property isn’t suitable for industrial use, abandoned retail properties often have great logistics potential as micro-fulfillment centers. As capacity remains tight and more businesses try to gain a foothold in urban settings, we may see some creative solutions develop around all types of unused retail space.

Competition for Good Properties

Good properties may experience competition from other sectors, which could become a challenge for developers looking to grab up candidates for industrial conversion. Residential conversion will likely stand as the greatest competitor to the industrial sector in this area.

As manufacturing started moving overseas in the 1980s, property developers converted factories and warehouses into trendy multifamily apartment buildings. When New York suffered from a glut of unused office space in the 1990s, multi-family swooped in again and converted tall glass office buildings into apartments. There’s no reason to believe that creative developers won’t make converting unwanted retail properties into luxury multifamily apartments into a defining trend of the 2020s.

While retail-to-logistics conversions will probably never lead the pack as a method for meeting industrial demand, the practice is expected to accelerate in 2021 as developers seek to supplement capacity created through more traditional conversions and new constructions.

About Phoenix Investors

Founded by Frank Crivello in 1994, Milwaukee-based Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.

Mr. Frank P. Crivello began his real estate career in 1982, focusing his investments in multifamily, office, industrial, and shopping center developments across the United States. From 1994 to 2008, Mr. Crivello assisted Phoenix Investors in its execution of its then business model of acquiring net lease commercial real estate across the United States. Since 2009, Mr. Crivello has assisted Phoenix Investors in the shift of its core focus to the acquisition of industrial real estate throughout the country.

Given his extensive experience in all aspects of commercial real estate, Mr. Crivello provides strategic and operational input to Phoenix Investors and its affiliated companies.

Mr. Crivello received a B.A., Magna Cum Laude, from Brown University and the London School of Economics, while completing a double major in Economics and Political Science; he is a member of Phi Beta Kappa. Outside of his business interests, Mr. Crivello invests his time, energy, and financial support across a wide net of charitable projects and organizations.

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