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The demand for physical retail shops isn’t what it once was, and that reality will have major ramifications for commercial real estate moving into the future. In 2019, retailers in the United States announced 9,302 store closings — 59% more than 2018, when closings emptied roughly 155 million square feet of space. It’s not that there isn’t consumer demand for retail products or a strong economy, but money in retail increasingly comes from online sales, making the usual measurement of sales per square foot more and more obsolete. Consider Payless ShoeSource, which has shut down hundreds of locations around the country but is reopening its online presence. Stores now need less of a physical footprint for selling.
This goes for all kinds of retailers. Walmart left box store after box store empty when it made the move from local operations to megastores. Similarly, banks are moving business to kiosks where automated technology facilitates interactions, rather than maintaining physical local branches as part of their footprints.
However, that doesn’t mean physical space is no longer necessary for businesses. It just means those spaces will be used in more strategic and relevant ways. Retailers might be moving a lot of their business online, but they still need places for products to be shipped, to be stored and broken down into component parts, to be collected for shipping to customers’ doorsteps and possibly to be returned. Whatever a product is and wherever it comes from, it almost always needs a home between manufacturer and final destination.
Essentially, industrial is making retail locations increasingly obsolete.
What This Means For Commercial Real Estate Investors
Regardless of the market, there is always opportunity to be had in commercial real estate. It’s all about your perspective and how well you’re positioned to act on it. You can find good deals anywhere at any time and in any economic situation — you just have to do your homework to ensure you’re executing on the right investments for the right reasons.
Be creative, nimble and flexible. As quickly as the economy moves these days, you’ll suffer the consequences if you’re not an adaptable, attentive investor. That said, how can you act on this shift from a retail market to industrial — and do so successfully? Here are three places to start:
1. Vacant, Distressed Properties
Investing in vacant, distressed real estate assets and converting them to alternative uses could be a great opportunity. There will be phenomenal buys for just pennies on the dollar that you can reposition and increase the value of in significant ways. However, you’ll have to be creative and have a plan. What will you turn it into? A warehouse? A school?
I believe in using a commercial real estate platform to make a positive community impact. I also believe that education is one of the key civil rights issues of our day. So if we buy vacant or distressed real estate assets that aren’t going to serve their original purpose (like a retail location), we can build them into schools. This benefits the neighborhood by turning something vacant into a productive, thriving part of the community. It’s good for the school, too, because it can occupy a building at far less than its replacement cost, which keeps more money in the classroom and with the teachers, where it can do the most good. I offer this recommendation from experience: We bought a vacant two-story building in Colorado Springs, Colorado, for less than 50% of its replacement cost value and worked with a local school that now has more than 600 students. It was a good return and created social and economic value.
2. Last-Mile Industrial
Investors should be giving a lot of attention to last-mile industrial distribution facilities. These properties might be 100,000 to 200,000 square feet in a central area where products can be taken to larger facilities, delivered to smaller facilities or taken for quick deliveries.
One of the buildings we bought was on the last-mile side of things, and we sold it to a boot manufacturer that had overseas operations and wanted a facility where it could come in and ship its product. The manufacturer was based in India and shipped its product into this last-mile property in Denver, which it then used to ship its product regionally. This building let the company serve the Denver area and have a regional impact, too — and all because it bolstered a retailer’s operations by serving industrial purposes.
3. Large Distribution Facilities
If you’re looking to invest in big-box industrial facilities, there’ll be ongoing demand for that as well. Larger groups considering investing in larger distribution facilities and centers will continue to do well over the next three to five years at least.
If you can’t buy these assets directly, consider buying stock in different companies or partnership interests that invest in diverse properties that strategically align with your portfolio and make sense in terms of what you believe the future will hold. For instance, we own a larger distribution facility in Alabama that brings in and makes car parts and then ships these throughout the country to various auto manufacturing facilities.
Whichever path you choose or investment you focus on, know that you’re doing so in the midst of major industry change. Retail is becoming less, and industrial is becoming much more. Because of that, commercial real estate is transforming at every step of the way. Don’t let the reality of retail’s changing dynamics keep you from investing. Instead, invest in the many industrial asset opportunities ahead.