Retail, Distribution Space Set to Converge
Growing e-commerce and emphasis on delivery speed and pick-up services for retail goods will likely lead to a “convergence” between industrial and retail real estate, said Fitch Ratings, New York.
Fitch noted that ongoing changes for retail real estate and industrial/distribution space have endangered the future of shopping centers and lower-quality malls. “E-commerce continues to take share from bricks-and-mortar retail, resulting in tenant and retail property softness,” Fitch’s Retail & Distribution Space to Converge Due to E-Commerce report said.
But well-located retail properties and real estate investment trusts with portfolios centered on consumer demographics will see continued demand as delivery and pickup services gain momentum, Fitch said.
“Retail real estate sites and e-commerce ‘last-mile’ distribution sites now essentially serve the same purpose–the distribution or staging of goods for sale to the end user,” the report said. The “last mile” is the distance between the last distribution center and the consumer. “One has a delivery focus but without public access, the other has public access but without a delivery function. Retail centers that exhibit the best demographics, which include per-capita income and population density, will be most easily repositioned and most capable of managing the secular shift in how goods are sold and purchased in the 21st century.”
Fitch said infill retail locations that can also function as delivery and pickup locations–basically becoming retail distribution facilities–will likely thrive as this convergence accelerates. “The need to distinguish between an attractive retail or last-mile distribution site–zoning notwithstanding–will become less meaningful as the function of the real estate is the same: providing a way to distribute goods to customers,” the report said. “The old real estate axiom ‘Location, Location, Location’ applies, possibly now more than ever.”
In the past, shopping center and regional mall values reflected proximity to population centers and per capita income, Fitch noted. “While these measures will continue to determine the attractiveness of a site, last-mile distribution and pickup purposes will also be considered in drawing consumer foot traffic and buying power,” the report said.
Some REITs are currently discussing what to do with excess parking facilities if ride-sharing services such as Uber and Lyft continue to grow, Fitch said, noting that excess parking facilities or underutilized retail space could be converted to small-scale last-mile delivery and pickup distribution facilities.
Investors and operators would be wise to focus on demographics, the report noted. “When it comes to last-mile retail distribution, underwriting on location based on consumer demographics may take on as meaningful importance as in-place net operating income,” Fitch said.
