Dive Brief:

• Retail to industrial real estate conversions are on the rise, according to a CBRE report released Thursday. The firm is tracking 59 such projects that are underway or have been completed since 2017, 35 of which have launched since January 2019 alone, totaling 15.5 million square feet of converted industrial space.
• The trend has been driven by consumers moving away from mall-based and big-box retail, and it was accelerated by a mass shift to online shopping during the coronavirus outbreak. As e-commerce grows in popularity, fulfillment and last-mile delivery volumes are steadily increasing, prompting shippers to seek warehouse space closer to their customers. The top five markets for retail facility conversions are Milwaukee, Cleveland, Chicago, Dallas/Ft. Worth and Omaha, Nebraska, according to the report.
• "I do not think this is a regional concept," John Morris, executive managing director of Americas industrial and logistics and retail leader at CBRE, told sister publication Supply Chain Dive via email. However it "makes more sense in markets where there is more disposable income and more population density, or perhaps in a suburban area near such a market where the base value of the retail property is not too high to begin with."

Dive Insight:

Over the course of the past six months, various experts have predicted that the warehousing sector is well-positioned to successfully weather the pandemic, due to a shift toward more regional supply chains. As import flows from China normalize and domestic e-commerce demand increases, shippers are on the lookout for more local space to stage inventory. Simultaneously, a wavering economy makes saving costs important. Retrofitting retail properties can enable them to do both.

Big-box stores are often surrounded by large parking lots and can have loading docks with clearance heights compatible with industrial use, according to CBRE. Morris said he expects more of these types of conversions to happen over the next five years as collocating fulfillment space in customer population centers becomes a higher priority for shippers.

When embarking on a retail conversion project, it's important to consider, "What does the space need to be?" he said. "Because, on average, this retail property would normally have a higher base cost than a logistics property on the same land. It is important for these properties to be converted in a fashion that is more specific and more directly targeted towards exactly what the user needs will be."

If the retail property is currently performing well, and market intelligence suggests that it could continue to do so, a hybrid retail-fulfillment model could work best, Morris said.

However, if "the value of the location as a retail property has significantly declined, then that wholesale conversion, to a full logistics and industrial location is going to be more valuable and make more sense," he said.

Generally, properties without existing docking bays or compatible ceiling heights are often demolished in favor of new-build warehouse facilities, the report said.