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COVID-19 has accelerated existing trends across all industries. Commercial real estate is no exception, particularly retail.
Consumers are turning to online shopping in greater numbers than ever before, causing huge demand for distribution centres. Meanwhile, physical distancing is hitting the retail sector where it was thriving – restaurants and experiential retail.
The relationship between industrial and retail was becoming increasingly intertwined before COVID-19.
As national retailers enhanced their ecommerce capabilities, distribution and logistics facilites were needed for everything from grocery orders to home office supplies.
Retailers were keeping less inventory on site in order to increase the number of unique items in stores, and they relied on just-in-time supply chains.
Now, with stores closed and online shopping levels reaching new heights, this integration has never been clearer.
A Shifting Relationship
Industrial and retail properties are “increasingly intertwined to the point where they almost form an integrated asset class unto themselves,” said CBRE Vice Chairman, Paul Morassutti, in CBRE’s latest Virtual Market Outlook webinar.
He pointed to the rise of Canadian ecommerce giant, Shopify. The company provides a platform that competes with Amazon and includes a $1-billion fulfillment network.
Last year, Shopify paid nearly $500 million to acquire a company that provides technology to warehouses.
“Now is this a retail play, a technology play or is it an industrial play?” asked Morassutti. “The answer is it’s all three.”
It’s just one example of how companies are leveraging industrial space to fulfill online retail needs, which will only increase as consumers continue to shop from their living rooms.
Consumers are now shopping for things online that they had long insisted on buying in person. More people are buying groceries online for the first time and finding that they like it.
This is increasing the value of the real estate required to accommodate the soaring ecommerce demand. Morassutti gave the example of a national grocer recently acquiring an industrial building as part of its last mile grocery delivery chain.
“The sale price is reportedly above the price that was provided as guidance,” he said. “The transportation costs of getting a product to the consumer as quickly as possible – whether it is food or sneakers – dwarfs the cost of real estate.”
As demand for last-mile delivery continues to rise, more companies will be making this same calculation.
The Future of Experiential Retail
Not all retail is tied to online shopping. The much-discussed promise of experiential retail is can’t be delivered on in a world of physical distancing and mandatory store closures.
The pressures facing bricks and mortar retailers are not new and the retail sector has been in transition for years. Still, there is no question that COVID-19 has expedited structural shifts and that it is getting harder to talk about retail space without mentioning its industrial underpinning.
Customers may not leave a Tesla showroom in a new vehicle, but they get an experience and a brand impression that few other retailers offer.
What happens to those who rely on experience to sell their product? It remains an open question, but landlords may be able to support this sector by shifting from a traditional rent model to one in which rent paid depends on sales volume.
“Going forward, we expect that landlords will work closely with tenants and we could see the re-emergence of pure percentage rent deals, especially for restaurants,” says Morassutti.
Brookfield Property Partners has taken the concept to the next level, announcing plans to invest $5-billion in shoring up retailers in its malls.
“The biggest concern in the retail world is how long will social distancing be required, because retail and social distancing do not go together,” said Morassutti. “That is a huge question mark.”