Plans to convert retail space into logistics centres struggle to take off

With hundreds of stores closing their doors to customers for good at a pace never seen before, the retail space available has reached uncharted levels. While this wave of retail stores closures started over a year ago, the unstoppable advance of coronavirus has proven the deadly kiss to commercial property worldwide. In the past few months, rising demand for urban real estate to support last-mile logistics gave some hope to struggling retailers’ landlords and commercial property owners. The idea was converting shopping centres, department stores, and even former flagship stores into distribution centres.

Simon Property Group, the largest shopping centres owner in the U.S. was reportedly in talks with Amazon to possibly take over former anchor department store spaces for distribution sites. Sources close to the matter quoted by media such as ‘The Wall Street Journal’ noted the talks involve spaces currently or formerly occupied by J.C. Penney Co. and Sears Holding Corp., which have been closing stores around the country in the midst of Chapter 11 bankruptcy filings. Neither company confirmed the report back then.

Real Estate experts voice their concerns about turning stores into urban distribution centres

While novel, this alternative seems to struggle to materialise, with many experts voicing their concerns about the real potential for this trend to take off. The latest Prologis research study stated mall anchor redevelopments have become more feasible for such a conversion and retail owners are doing due diligence and considering all conversion opportunities, but primarily multifamily. In this regard, the authors of the report acknowledge the explosive growth of e-commerce during the COVID-19 crisis which “has brought more than five years of evolution in the retail landscape into less than five months of time.”

Nevertheless, this research found that the retail-to-logistics trend is still in its infancy and will likely be a “slow rising tide” due to rezoning challenges and physical site limitations surrounding urban retail space, among other issues. Of similar opinion is Carl DeLuca, vice president of Real Estate for DHL Supply Chain, who said “I still feel like there’s a lot of talk on this, and not a lot of [action]” in an October interview about industrial real estate trends. He emphasized problems such as zoning and the high cost of converting space into usable logistics operations as some of the key challenges.

Economic, political, physical and legal barriers

Prologis estimates that retail-to-logistics conversions in the United States will amount to between 5 million and 10 million square feet per year—less than 1 percent of existing logistics real estate facilities and less than 10 percent of the logistics space needed to meet the incremental demand anticipated due to accelerated business trends related to Covid-19. Retail conversions are complex, with the challenges around them falling into four key areas, according to Prologist: Economic: Reconverting retail space into logistics space comes in at a high price, being more expensive than repurposing that same space into apartment buildings or offering it to other retailers. Indeed, the next-generation use of vacant retail space is likely to be a new retailer, Proglogis said.

Political barriers include restrictive zoning and community opposition to projects. Urban retail space is often located near residential space, further complicating the issue. Physical obstacles such as poor reconfigurability of existing structures, inefficient site layouts, and space constraints make it complex for conversion plans to succeed. Quite frequently, retail spaces aren’t normally big enough to serve as distribution centres. Legal—primarily because many parties often have a stake in the outcome. With malls, in particular, land is often controlled by multiple owners, which can make the process time-consuming and layered.

Jon Sleeman, lead director of logistics and industrial real estate research in the United Kingdom and Europe for commercial real estate giant Jones Lang LaSalle (JLL), says retail-to-logistics conversions are more common in large retail warehouse parks in the European market—the equivalent of U.S shopping centres near large cities and towns—rather than in malls or department stores. Sleeman notes that Amazon.com has purchased such space around London, primarily for last-mile logistics.

“The retail warehouse parks lend themselves a bit more to repurposing for logistics,” Sleeman said. “By and large, if you want to run a logistics operation you need to run out of a warehouse. It’s really only in places where you can’t find the right location where you’d look at repurposing different kinds of facilities.”