Department store to distribution center?

The COVID-19 pandemic has accelerated many consumer trends that were already emerging, the most significant being the scaling back of in-person retail and the scaling up of on-line shopping. Both of these developments have had major impacts on commercial real estate.

On the retail side, as in-person shopping has decreased, there has been a surge in available storefront space. This has only been amplified by people staying close to home due to COVID-19 concerns. This trend spans main-street retail, as well as shopping malls, which continue to struggle. While standard retail spaces may be harder to re-purpose, it is likely that we will see larger ones converted to industrial use.

This strategy is already gaining traction. It has been reported that Amazon is in talks with Simon Property Group (the biggest mall owner in the US) to turn retail space into fulfillment centers. Amazon would take over spaces formerly occupied by Sears and JCPenney, both of which have filed for bankruptcy and closed dozens of stores.

There are many benefits of this scenario for Amazon. It would occupy well-located warehouse space in cities, which would help decrease delivery times across its distribution network. Specifically, mall retail space offers the following advantages:

  1. Lots of space – many markets are very tight on the industrial side and it is hard to locate blocks of space large enough to accommodate industrial use.
  2. Proximity to large population centers – being close to large quantities of people can reduce delivery times and puts you near large talent pools.
  3. Proximity to the highway and public transportation – this is key in the transportation of goods, as well as in attracting workers.
  4. Infrastructure in place – existing mall infrastructure (plumbing, HVAC, etc) makes it possible to get operations up and running more quickly.

With industrial demand far outpacing supply in many markets, this retail conversion scenario could be a win-win. It will generate income for retail landlords and taxes for municipalities, while providing the much needed space that e-commerce giants are looking for.