New Places and New Spaces for E-commerce Distribution: Three Strategies Bringing Industrial and Retail Real Estate Closer Together

The COVID-19 pandemic dramatically accelerated demand for e-commerce. Correspondingly, it accelerated demand for distribution space from which to fulfill purchases made online. These conditions have led developers in land-constrained markets to consider new formats for distribution buildings and pursue redevelopment projects that would not have been feasible before 2020. At the same time, brick-and-mortar retailers have responded to customer preferences by expanding online order pickup services and shipping orders from retail stores. Together, these trends are contributing to the convergence of industrial and retail real estate, with implications for developers, investors and building owners.

The NAIOP Research Foundation commissioned this report to examine three trends related to this convergence: the conversion of shopping centers to distribution centers, adding distribution uses to existing retail buildings, and the development of mixed-use properties that include both distribution and retail. The author conducted secondary research and interviewed developers, investors, architects, analysts and other commercial real estate professionals to identify the opportunities and risks associated with each strategy. Some findings include:

• Functionally obsolete shopping centers can be attractive targets for conversion to distribution space given their size and location. However, developers should weigh these advantages against the costs associated with converting or demolishing existing buildings, possible political opposition and the difficulty of acquiring full control of a shopping center.
• Retailers are adding distribution capacity and online order pickup and return services to existing retail stores to enhance their customers’ shopping experience. New retail development can facilitate this strategy and minimize congestion in parking lots and store aisles by tailoring building and parking lot design to the needs of both in-store and online customers.
• Some developers are pioneering mixed-use developments that colocate retail and industrial space. Locations near transportation networks and population centers often support both uses and onsite retail can serve as an amenity for logistics workers. However, pedestrian safety requires careful planning to segregate industrial and retail traffic, and developers should be prepared to address local concerns about a development’s traffic impact on adjacent roads.

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