One aspect of the COVID-19 commercial real estate puzzle that has yet to be solved is how will retail rebound. Retailers have been forced to reimagine themselves to adapt to the changing needs of a society that is now more dependent than ever on e-commerce. Retail real estate will have to do the same.
During the height of the pandemic, when mandated closures and stay-at-home orders caused peak demands in our supply chains, we witnessed relatively minor hiccups in the logistical flow of transporting and receiving household goods—much of which could probably be attributed to individuals hoarding essentials for resale and then price gouging them as a third party seller online. Like many Americans trying to place orders online grocery orders to be picked up in-store, you may have felt the frustration of having to constantly refresh whichever app you were using to find a time slot for pick-up. Perhaps you made a trip to the store only to find that toilet paper and bottled water were completely sold out. Even worse, you may have resorted to less-than worthy paper products to wipe your bum.
All things considered, these inconveniences were relatively minor and short-lasting as the corporations responsible for supplying our goods hired hundreds of thousands of workers and worked tirelessly to smooth out these kinks. Clearly though, not all the kinks have been completely worked out, nor are they all as inconsequential as inadequate toilet paper. In certain hotspots across the country, medical works are dying from COVID-19 because they were forced to reuse personal protective equipment like masks. While it may be difficult to pinpoint exactly where the ball was dropped, we know we need to continue to make improvements in our supply chains, which includes the logistical plans for retailers. In addition to helping retailers adapt to new e-commerce demands and new logistical requirements, another important question for the industry is what to do about so many dark storefronts.
To help solve these issues JLL has created a Retail Industrial Task Force with the goal of examining the ongoing evolving needs and requirements for their clients in this space. I spoke with Craig Meyer, the President of Industrial at JLL, who shared with me the ideology behind this project and how it’s helping their customers solve some of their most challenging issues. “The idea here is to begin to knit together a one stop shop for our clients who are interested in solving issues that were already on their way and are now being exacerbated by COVID-19,” he said.
The idea here is to begin to knit together a one stop shop for our clients who are interested in solving issues that were already on their way and are now being exacerbated by COVID-19
Meyer explained that there are really three types of clients this task force is servicing: retail occupiers or tenants, retail property owners, and developers looking for opportunities for industrial developments. In many cases, we’ve seen these retail occupiers closing stores, so this presents several different issues that need to be explored, one of which “is what do we do with dark stores that we have?” according to Meyer. More specifically, he went on, “How do we repurpose them? Also secondarily, as they begin to convert their businesses, they are a lot less dependent upon the retail store front as they are moving online, so how do they reconfigure the supply chains to bring their product to their end customers, who may not be coming through the store but will be having it delivered to their front porch?” Not only are there dark stores to account for, but there are also new logistical challenges that arise from the move toward direct to customer (DTC) fulfillment.
The second group of clients that the task force addresses is retail property owners themselves, who also must determine what to do about dark stores, but more broadly need to consider the implications of a society that is largely shifting their shopping habits. They’re “confronted with a declining retail footprint as a result of increasing online sales, which again has been exacerbated by COVID-19,” Meyer explained. In many cases, the owners of malls and shopping centers need to consider alternative uses, but there are many complex issues that go into repurposing a property. Retail owners need to do some research in order to understand what their options are. “Is it the right location? Can you get a zone change on it? Is there the ability to have some kind of point of sale for revenue? You have to worry about congestion and traffic and sustainability,” said Meyer.
In some instances, Meyer explained, retail properties across the U.S. may have originally been zoned for industrial use, making a conversion easier. However, the majority haven’t, meaning that converting the property to a partial fulfillment or distribution center might not be a viable option. Owners need to really dive into the best and highest use. Perhaps, these properties might be better converted into senior housing or medical facilities.
“We’ve also retooled our research departments to begin looking at a variety of momentum indexes around these things,” said Meyer. For example, for large scale fulfillment centers, it’s important to research the availability of labor in the surrounding area and calculate the costs of transportation. For micro-fulfillment centers or urban logistics, it’s more important to understand the demographics, including where the customer is located, what kinds of products they want, and traffic congestion. There is no simple answer. This is why JLL created the task force—to answer these complex questions.
The last group of clients that the task force addresses are developers, particularly industrial developers. “With the rapidly increasing footprint of fulfillment centers and last mile trip fulfillment centers especially, they’re looking for locations in high density environments where they can build.” Meyer said. These developers are interested in places like Seattle, San Francisco, Los Angeles and New York, where there is a tremendous need for urban logistics centers, including cold storage which continues to see rapid growth in demand, sped along by COVID-19. Now, more so than ever, all three of these clients’ interests are intertwined, and in many ways, their businesses depend on the success of the others.
“We’ve really aligned all the resources we have between what used to be separate approaches for this customer base and united them together in a very easy to understand and thoughtful multidisciplinary approach,” explained Meyer. Some of the services JLL will provide these clients are “supply chain consulting, retail and e-commerce distribution, urban logistics, retail redevelopment, industrial diagnostic process, and a proprietary system that looks at demand and metrics of real estate,” according to their recent press release.
Although Meyer commends the quick, adaptive response of firms during the height of closures from COVID-19, he also acknowledges that these are some really complex problems. “There isn’t this straightforward, simple answer. We are going through a profound shift in the U.S. and how people buy things,” said Meyer. While we may not yet have all of the pieces needed to see the bigger picture when it comes to the future of retail real estate, as we start to attempt to put the puzzle together, it will become more clear where the gaps remain. As we undergo a paradigm shift in the way Americans shop, logistics will become a larger part of every retailer’s business, putting new requirements on the real estate industry that services them.