[REN #935] Real Estate: Malls Support E-Commerce with Vacant Store to Warehouse Conversions

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Real Estate: Malls Support E-Commerce with Vacant Store to Warehouse Conversions, Real Estate News for Investors Podcast Episode #935 Header

Demand for warehouse space is skyrocketing as more and more people shop online, and that is providing another option for struggling malls. Mall owners with vacant space on their hands or retailers with an online presence are turning retail space into warehouse space for e-commerce. And there’s plenty of room for this trend to fly. A new report from commercial real estate services firm JLL says we may need another 1 billion square feet of warehouse space by 2025.

We’ve been seeing the headlines for years now about the closing of stores and the impending retail apocalypse for U.S. malls. That’s a scary proposition for any community because vacant malls are an eyesore that can reduce property values, make it harder for residents to shop, and take a bite out of tax revenue for local governments.

Repurposing of Vacant Malls

According to a 2020 case study on the repurposing of vacant retail malls by the National Association of Realtors, stores have been folding at a much greater pace in recent years, because of e-commerce. NAR says, e-commerce sales only accounted for a total of $27.5 billion in 2001. That was less than 1% of retail sales. Fast forward to 2019, and e-commerce sales add up to about $600 billion or 11% of the retail sales industry. (1)

The closing of stores didn’t really accelerate until about 2017, but that has also been combined with another phenomenon. As many stores shut down, even more were opening, indicating a rebound. Then the pandemic hit, so whatever retail rebound we might have been experiencing is now facing new challenges. Many more walk-in stores may close if the pandemic continues for much longer, but online retail is growing and that’s what will drive demand for warehouses and distribution centers in the future.

The NAR Research Group conducted a survey among 65,000 commercial members who responded with information about 94 vacant malls, and how they are being repurposed.

  • 31% said they knew of vacant malls that were repurposed with new stores, or popups, or with new anchor tenants.
  • 16% said that malls were converted into mixed use space with offices, stores, and housing.
  • 9% said that dead malls (and shuttered stores) were turned into warehouses
  • 7% reported that malls were turned into multi-family complexes
  • 5% said they were being used as distribution and fulfillment centers for e-commerce

Many also reported more unusual conversions like call centers, cannabis dispensaries, data centers, churches, self-storage, and even a cricket stadium. Some are also turning dead mall space into college or university facilities and health care clinics or hospital extensions.

Leasing Activity Growing for E-Commerce Space

Due to the latest surge in e-commerce, warehouse space and distribution centers may work their way higher on that list. JLL says that before the COVID-19 crisis, about 35% of its industrial leasing activity was tied to e-commerce. Four months into the pandemic, it says 50% of that leasing activity is due to e-commerce. Because so many people are now buying food online, JLL says that another 100 million square feet of cold storage is needed right now, just to meet current demand. (2)

A firm called eMarketer is predicting that by the end of this year, e-commerce will account for 14.5% of all retail sales. That’s more than $700 billion for 2020. We could see that percentage hit 18% for retail sales worth more than $1 trillion.

Warehouses Needed for E-Commerce

Warehouses are needed to support e-commerce, but at the same time, they could help mall landlords trying to fill empty space, and pay their own bills. Commercial real-estate services firm CBRE just completed an analysis on retail-to-industrial conversion projects. It says, warehouses still take up a relatively small proportion of available industrial space, but it says demand has surged during the pandemic. Industrial real-estate activity jumped 43% from April 15th to May 14th from the previous 30-day period. CBRE attributes that to e-commerce retailers that need warehouse space for an inventory of food and consumer goods. (3)

Big retailers like Walmart, Target and Amazon are also making changes to accommodate online shopping. In many cases, they are shipping goods directly from local stores. You’ll see a Whole Foods tab on Amazon, and products listed on the main site that say Whole Foods. If you add those to your cart, the order will be filled by your nearest Whole Foods store. Some stores are offering curbside pick-up while others are providing door-to-door deliveries.

The Wall Street Journal reports that the importance of warehouse space is reflected in rising rents. According to CBRE’s Mr. Walaszek, the gap is becoming much smaller between higher retail rents and lower warehouse rents. Many experts say that even when the pandemic is over, consumers will have become accustomed to shopping online and many may continue. (4)

Real estate investors should always check the retail environment of a community as part of due diligence. That may also involve some research into what mall operators and landlords are planning to do with a mall in the future, and how those plans are perceived by housing experts in the area.

Links:

(1) NAR Report

(2) CNBC Article

(3) Wall Street Journal: Warehouse Demand

(4) Wall Street Journal: Retail Apocalypse

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