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The Next Phase Of The Retail Apocalypse: Stores Reborn As E-Commerce Warehouses

As the demand for in-person shopping diminishes, landlords, startups and retailers are converting abandoned stores into online fulfillment centers. The Next Phase Of The Retail Apocalypse: Stores Reborn As E-Commerce Warehouses

When Litisha Thomas heard through the gossip mill that the shuttered Sam’s Club where she’d worked for 11 years might be reopening in her rural North Carolina hamlet, she immediately jumped on an internet job board to see if it was hiring. It was, but this wasn’t a conventional reopening.

Sam’s Club, the discount shopping club named for the founder of Walmart Inc., was changing how it does business. The retail giant’s subsidiary converted the entire building, which reopened in April 2019, into an e-commerce fulfillment center, where orders from samsclub.com shoppers throughout the southeast are picked, packed and placed on trucks that take them to other shipping hubs.

Ms. Thomas—who’d previously driven a forklift as an overnight receiving associate at the Sam’s Club in Lumberton, N.C., population 20,000—is back behind the wheel of a forklift, though now she’s a manager overseeing eight other employees.

The building in which she works looks about the same on the outside, but inside, instead of wide aisles filled with shoppers pushing carts, its floor-to-ceiling shelves are packed more densely than ever with goods being picked by employees and shuttled to conveyor belts.

Despite the lack of shoppers and cash registers, total employment is actually up: Previously the store employed 164 workers, about a quarter of them part time, says Ms. Thomas. Now there are nearly 300 full-time employees across three shifts.

Welcome to the next phase of the “retail apocalypse.” This conversion—which Sam’s Club has also completed for five other big-box stores throughout the country—is part of a burgeoning trend in which retail spaces of all sizes are being converted into e-commerce fulfillment centers. The global pandemic may have turbocharged the shift from bricks-and-mortar retail to online shopping, but the rate of conversion of retail into industrial spaces has been accelerating for years, says Matthew Walaszek, associate director of industrial and logistics research at CBRE Group Inc., the world’s largest commercial real-estate services firm by revenue.

A just-completed CBRE analysis found that since 2017, 60 new retail-to-industrial conversion projects have entered at least the preplanning stage, out of a total of 94 such projects completed or in progress in the past decade. Projects begun or completed since 2017 transformed 14 million square feet of former retail space into 15.2 million square feet of industrial space, most of it for e-commerce distribution. That’s still a relatively small proportion of the 14.5 billion square feet of industrial real estate in the U.S.

“We wouldn’t say [these conversions] are moving the needle quite yet, but it’s a trend that has legs and we’re going to see this expand into the foreseeable future,” says Mr. Walaszek.

Warehousing startup Ohi is certainly counting on it. The company operates, or provides operational software for, micro-warehouses for e-commerce fulfillment ranging in size from a few hundred to a few thousand square feet in 80 cities across the U.S.

One of its locations is in former office space on West 38th Street in Manhattan’s Garment District. That’s unusual—e-commerce fulfillment hubs are typically in suburbia, occupying up to a million square feet. Ohi’s warehouses are used by both well-established brands and small direct-to-consumer ones aiming to reach relatively well-off consumers in cities. These startups use Ohi’s fulfillment centers to store their goods close to consumers, allowing for same-day delivery, says the company’s founder and chief executive, Ben Jones.

Brands using Ohi’s warehouses include Olipop, which advertises its “prebiotic sparkling tonics” as healthy alternatives to soda.

“We ship nationally from Montana, but at the mercy of FedEx and UPS, ” says Steven Vigilante, Olipop’s growth marketing manager. Moving New York City customer delivery to Ohi’s Manhattan fulfillment center cut average shipping costs in half and delivery times from 1 to 2 weeks to as little as two hours, he adds.

Between these two extremes are medium-size retailers catering to middle-income Americans, many of which are looking to add e-commerce fulfillment to their existing stores. A number of big grocery chains across the globe, including Albertsons Cos., Wakefern Food Corp. and France’s Carrefour SA, fall into this category. They are using or planning to use almost fully automated micro-fulfillment warehouses either within existing stores or in adjacent retail spaces, says Max Pedró, co-founder and president of Takeoff Technologies, which provides them with automated systems.

Takeoff’s 10,000-square-foot micro-fulfillment centers hold the portion of a typical grocery store that represents most of its sales, or around 15,000 different item types. They make extensive use of robotics and automation to retrieve groceries from shelves, and so require little in the way of human labor to operate until the final stages of each order.

These automated systems are meant to assemble and pack orders more efficiently than employees roaming aisles or visiting stockrooms, and keeping the fulfillment center next to the store has additional benefits, notes Mr. Pedró. Both can be resupplied from the same trucks, staff can move between the two as demand shifts between them, and their proximity to customers can save retailers some delivery costs.

Many big retailers, including Walmart, Target Corp. and, in its forthcoming grocery stores, Amazon. com Inc., are taking a related but distinct approach: shipping directly from stores. Even stores that have begun offering curbside pickup amid the pandemic are, in a way, becoming part of the trend.

Each business that decides retail space might be better used for filling e-commerce orders does so for its own reasons, but two intersecting trends play a big role. Retail stores and shopping centers were closing on account of declining foot traffic even before the pandemic, as e-commerce continued gobbling bricks-and-mortar retail market share like Pac-Man chomping ghosts. Since March and the beginning of stay-at-home orders in the U.S., the trend has only accelerated.

Meanwhile, rents for e-commerce fulfillment and other industrial spaces are climbing due to that surging demand. The gap between higher retail rent and lower warehousing rent is closing, says CBRE’s Mr. Walaszek.

Office space can also be converted into micro-fulfillment centers, and Ohi has set up at least one of its small fulfillment warehouses in what was once office space. As companies reconsider whether they ever want their employees to return to offices, more of this kind of real estate could also be available.

As Americans shift from buying things in-store to buying them online, all of those goods have to be shipped from somewhere. The faster we demand they get to us, the closer they have to be stored, which necessitates more e-commerce warehouses than ever, and in places they’ve rarely been seen before, such as city centers.

One economist who has looked at these trends has concluded something surprising: When you include all the jobs in fulfillment, delivery, and related roles, e-commerce has created more jobs between 2007 and January 2020 than bricks-and-mortar retailers lost, says Michael Mandel, chief economic strategist at the Progressive Policy Institute, a think tank. Since January, employment in this sector has fallen, but Dr. Mandel believes that as consumer spending recovers, so will employment in this area.

While it’s easy to see these trends as broad abstractions, they’re also why Ms. Thomas—a mother of two living in a small southern town—has a job, and a pay raise.

Every day, she goes to the same building she worked in for over a decade before it closed in January 2018. There are some differences. The sign says Samsclub.com instead of Sam’s Club, she says, and the parking lot is full of tractor-trailer trucks. Inside, things have changed more. There’s more merchandise, new conveyor belts, a shipping area. “Sometimes I’ll catch myself walking the floor and picturing what it used to be,” she adds.

Sam’s Club customers are still shopping with the company—it’s just that, like so many of us, they’re now doing it from home. If trends continue, then in terms of jobs, real estate, consumption patterns, supply chains and land use, as Lumberton, N.C. goes, so goes the nation.

Updated: 9-30-2020

Store Landlords Face A Battle For A Cut Of Online Sales

Commercial landlords are increasingly exposed to the fluctuations in their tenants’ day-to-day business.

If retailers want leases that reflect modern shopping habits, should they hand over a cut of online sales to their landlords?

Some property owners think this would be a fair trade off in the clamor for more flexible rent arrangements. So far, though, there is no good way to measure what landlords might be entitled to and tenants have few reasons to play ball.

From global fashion players like Zara and H&M to mom-and-pop stores, most retailers are demanding better terms from landlords as the Covid-19 pandemic slows sales, particularly offline. In the U.K., shop owners received only two-thirds of the quarterly rent they were owed in the three months to Sept. 22, according to data by Remit Consulting. More tenants now want to hand over a percentage of their sales as rent rather than a fixed monthly or quarterly fee, an arrangement already common in the U.S.

Whatever the lease structure, commercial landlords are increasingly exposed to fluctuations in their tenants’ day-to-day business. That is a problem for valuations, among other things. “How do you value your assets if they are based on turnover that is constantly going up and down,” said Tom Whittington of global real-estate agent Savills.

Uncertainty about future cash flows and how to service heavy borrowings has weighed heavily on the share prices of big European retail landlords such as Unibail-Rodamco-Westfield and Hammerson. Having fallen around 80% since the start of the year, their stocks now trade at a fraction of net asset value, reflecting investor concerns about equity raises as well as where rents and valuations will settle.

To offset some of the new risks, landlords are looking at whether they can include a portion of a retailer’s digital sales in the pot of revenue that is used to calculate the rent. Hammerson, for example, will let U.K. tenants switch to turnover-based leases, provided they pay an “omnichannel topup.”

Retailers, which are already paying rent on e-commerce warehouses and often don’t make strong margins on online sales, will be understandably reluctant to hand over a cut. But there is some evidence that physical stores drive digital purchases. Opening a new shop in an area increases traffic to the retailer’s website by 37%, according to a study by the International Council of Shopping Centres.

Even retailers admit as much with omnichannel strategies that try to break down barriers between store and online purchases. For example, brands increasingly use their shops to take in returns of goods purchased online or to let customers pick up web purchases—so-called click and collect—saving on delivery and collection costs.

Measuring a shop’s halo effect on the online business is the difficult bit. Some landlords are looking at whether they can claim a cut of the e-commerce business done in a store’s catchment area. Hammerson plans to use metrics like a store’s click-and-collect activity to calculate its cut.

However things turn out, new lease arrangements will require retailers to open their books to landlords in a way they aren’t used to, and to explain how the online and store-based sides of their business interact. Rather than passively collecting rent, property owners will more than ever be partners in their tenants’ business. Negotiations between the two sides aren’t going to get easier any time soon.

Updated: 10-1-2020

Demand For Big-Box Warehouses Soars Under E-Commerce Surge, Report Says

Amazon is leading a pack of companies rushing to fill the biggest industrial sites in the U.S., says real-estate brokerage firm Colliers.

A key measure of demand for big warehouses soared 51% in the first half of 2020 as the pandemic-driven surge in online sales sent companies scrambling for space to store and deliver goods to locked-down consumers.

The rush toward distribution centers was most pronounced at the largest end of the market, real-estate brokerage firm Colliers International Group Inc. said in a report released Thursday, as Amazon. com Inc. and other e-commerce and logistics providers accelerated a push toward sprawling facilities to process, package and ship digital orders.

The report covers industrial buildings of 200,000 square feet or more in major North American markets.

“There is a surge in big-box occupancy,” said Pete Quinn, the firm’s national director of industrial services. “Amazon obviously leads the pack. They’ve got multiple big boxes going up all over the country.”

The online behemoth leased an estimated 26.9 million square feet in the first half of the year, and is expected to occupy nearly 98 million square feet across the U.S. in 2020 alone, the report said.

Overall, the Colliers report said the net change in occupied big-box space—known as net absorption—rose by 51% in the first half of this year in the markets covered from the same period in 2019, to nearly 79.8 million square feet.

For sites of 750,000 square feet or more, net absorption came to 34.3 million square feet in the first six months of the year, more than double the amount recorded for all of 2019, Colliers said.

Amazon has been racing to meet surging online demand after a wave of orders from homebound shoppers slowed deliveries in the early months of the pandemic. The company said recently it was opening 100 buildings in September alone, including fulfillment centers, delivery stations, sorting centers and other sites.

An Amazon spokeswoman declined to comment on the Colliers report but pointed to comments by Chief Financial Officer Brian Olsavsky in a July 30 earnings call, when he said Amazon plans to expand its fulfillment and logistics square footage by about 50% in 2020 from the previous year. Most of that capacity was expected “to come online in late Q3 and Q4,” he said.

E-commerce sales accounted for a record 16.1% of total U.S. retail sales in the second quarter on an adjusted basis, according to the Commerce Department. Online sales rose 31.8% from the first quarter, and jumped 44.5% year-over-year.

For industrial real estate, the rapid expansion of digital commerce appears to be offsetting slowdowns and bankruptcies in sectors such as traditional retail, Mr. Quinn said.

Companies are also looking for more space as they move away from lean just-in-time inventory practices following shortages early in the pandemic, when stockpiling shoppers emptied shelves and manufacturers struggled to ramp up production of in-demand goods such as toilet paper.

“Right now we’re guessing companies are increasing safety stock by about 5% to 15%,” boosting their need for warehouse space, Mr. Quinn said. “We don’t see a lot of companies downsizing their distribution.”

Competition for warehouse space is especially high in logistics hubs such as Southern California’s Inland Empire, Atlanta and the Dallas-Fort Worth area in Texas with large pools of skilled labor and access to key transportation routes. For example in Indianapolis, where several big projects are being built, tenants are locking in leases before the buildings are finished, Mr. Quinn said.

Developers are hustling to meet that demand. Some 96.5 million square feet of new big-box space was added in the first half of 2020, the report found, and an additional 170.7 million square feet was under construction at the end of the second quarter.

Updated: 10-6-2020

The Hot New Real-Estate Investment Is in Keeping Food Chilled

Cold-storage facilities are having a moment as the food supply chain adapts to the pandemic, and investors are taking notice.

Cold storage is becoming one of the hottest real-estate investments during the pandemic.

Lineage Logistics LLC, the world’s largest landlord of temperature-controlled warehouses, concluded a fundraising round last month that brought in $1.6 billion. It is expected to pursue a public offering, according to commercial real-estate analytics firm Green Street.

Americold Realty Trust, the only publicly listed cold-storage real-estate investment trust, recorded a 6% increase in net operating income in the second quarter. Together, the two firms have 59% of the cold-storage market share in the U.S. and are growing quickly.

Fans of this niche sector say the pandemic showed it can readily adapt to new customers and environments.

Cold-storage warehouses, which are similar to industrial warehouses but are refrigerated to store goods that need to remain fresh or frozen, usually cater to food producers, food wholesalers and retailers such as grocers, restaurants and other bulk buyers. But during the early days of Covid-19, shoppers swarmed supermarkets, hoarding frozen foods and other staples.

Grocers, farmers and meat producers suddenly had to repackage food in smaller portions so it could be stockpiled for grocery-store customers at a time when most restaurants closed down.

As restaurants began reopening, these facilities were able to shift back to the needs of its core business.

“The pandemic showed how cold storage is agnostic to the ultimate destination of the food,” said Harrison Klein, an analyst at Cohen & Steers Inc., a global investment firm.

Cohen & Steers is bullish on cold storage and made two recent investments, including $100 million in Lineage Logistics in its latest fundraising round. Cohen & Steers also is one of the biggest investors in Americold.

Cold storage doesn’t appeal to all real-estate investors. Because of the refrigeration systems, these properties cost about twice as much to build as an industrial building, according to real-estate consulting firm JLL. Cold storage has lower revenue growth than other rapidly growing sectors, such as industrial or data centers. Owners are exposed to risks in the food supply chain such as labor shortages, since they typically also handle the transporting and refrigerating of goods.

Employees at these properties also have been susceptible to the coronavirus. Workers sort, unpack, repack and freeze food which is then stored on pallets that can be stacked as high as 40 feet. Large facilities can employ more than 100 employees each, and Covid-19 has spread through a number of these warehouses.

Greg Lehmkuhl, chief executive of Lineage, said his firm had to temporarily shut down plants in New Orleans and Allentown, Pa., because of workers who tested positive for the virus. The company increased spending on sanitization and Covid-19 testing, and staggered work shifts to improve health safety, he said. Active Covid-19 cases fell to 27 in late September from more than 100 at the peak, Mr. Lehmkuhl added.

Advocates of cold storage say the business’s growth prospects look bright. Grocers such as Kroger Co. are investing more heavily in their supply chains and e-commerce capabilities to reduce transit and delivery times. That is fueling development of more cold-storage facilities, especially in densely populated areas where more people are demanding faster deliveries of fresh food.

JLL said the average U.S. cold-storage warehouse is more than 40 years old. Since tenants prefer newer buildings with more energy-efficient cooling systems and higher ceilings that can pack bigger volumes, expect more construction of these facilities in the years ahead, said Mehtab Randhawa, JLL’s director of industrial research, Americas.

“Most of the buildings are really old,” she said.

Americold, for its part, is building two cold-storage facilities in Connecticut and Pennsylvania for Ahold Delhaize USA which are due to be completed in 2022.

 

 

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