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Commercial Real Estate, Industrial Real Estate, Retail Real Estate

The Evolution of Logistics in Retail – Part II

In an April blog post, we wrote about the growing cohesion between retail and logistics and how “retailers will continue to operate as (and potentially resemble) distribution centers for their customers.” This trend is further solidified by the world’s largest retailer’s decision to experiment with combining retail locations with last-mile distribution centers1.  This move is made, at least in part, in response to the proliferation of the buy online, pick up in store (“BOPIS”) trend. Wal-Mart, Target and other large retailers and grocers have notably seen success through “drive-up” and “curbside” variations of the BOPIS trend.

Wal-Mart’s latest experiment ultimately boils down to balancing customer experience and inventory management. Customers often want to have their cake and eat it, too – wanting their products available immediately from multiple channels while also desiring a unique shopping experience. Prologis published a study that showed each 100 bps of growth in inventories is estimated to require an additional 57 MSF of U.S. logistics demand2. Most of this will be in the form of true industrial warehouse space, but we now know that, at least for Wal-Mart, some of that increased logistics square footage will be on the back end of large retail stores. As retailers desperately search for modern warehouse space close to urban population centers, the combination of brick-and-mortar retail with last-mile distribution may be the most cost-effective solution.

If you are an industrial and logistics nerd like me, you can imagine all of the variations of this trend across different product sectors. Take the home improvement and construction industry as an example. Imagine a well-located, in-fill warehouse for inventory and distribution. Then imagine a large retail showroom within that warehouse – a combination of Grainger Industrial Supply and Home Depot, for example. This facility can now theoretically provide a BOPIS and/or drive-up option in addition to last-mile delivery from its warehouse. As is often the case with adoption of new technology, this retail-logistics hybrid creates inventory synergies and ultimately deflates prices for consumers.

The main caveat is that consumer preferences are often unpredictable and don’t always react to change the way companies expect them to. Whether there are actual physical fusions of the two product types or improved synergies in supply chains between the two, the main takeaway is that consumer preference is trending towards having products and services on-demand, and that demand/supply imbalance is weighing heaviest on retailers’ ability to juggle inventory management and customer experience.

1: https://www.costar.com/article/632938702/walmart%E2%80%99s-experiments-with-combining-stores-warehouses-could-change-industry

2: https://www.prologis.com/logistics-industry-research/covid-19-special-report-5-supply-chain-shifts-poised-generate

Commercial Real Estate, Industrial Real Estate

Your User-Owned Warehouse – It’s Worth More Than You Think

The concept of a sale-leaseback, a transaction in which a company sells its building to a third party and leases the property back from the new owner, has been around for decades as a way for companies to boost their balance sheets and/or create flexibility in their facilities. A company can use that capital more efficiently to grow and maintain their business while still maintaining control of the property for a long period of time. Historically, local and regional industrial warehouses have garnered very little investor interest, but that has changed rapidly due to the collision of e-commerce and Coronavirus. According to CoStar, approximately 13% of the country’s sale-leaseback volume came from industrial deals in the second quarter, compared to only 4.7% a year prior.

The rise in e-commerce has had a very real and sustained effect on industrial real estate. According to a recent study by Jones Lang LaSalle, the United States will need an estimated one billion additional square feet of warehouse space by 2025. As a reaction to this economic trend, demand for industrial investment has given rise to numerous private and public investment firms with the primary directive to purchase industrial warehouses, specifically in highly populated and growing markets. The most clear result of that demand is an increase in prices being paid for existing warehouses, and user-owners (companies that own their own buildings) may not realize that the buildings they own are valuable even if their space use is unrelated to e-commerce or logistics. In other words, real estate investor interest generally lies more in the underlying asset than the current use of its occupant. For example, an electrical supply company that owns their own warehouse could sell their warehouse today for a significant premium due to its long-term utility in the growing e-commerce economy.

This investment frenzy has created the perfect situation for user-owners wanting to free up capital amid the current Coronavirus volatility. There is more investment capital in search of industrial warehouse properties than there are buildings to purchase, which makes the current environment the perfect time for user-owners to maximize their investment in their facility and strengthen their capital position for the future. Moreover, a sale-leaseback can benefit user-owners needing improvements to their space’s functionality by negotiating improvements into their lease and can maintain control of their time horizon by setting the leaseback term length.

If you are a user-owner considering a sale-leaseback or simply to sell your existing facility, contact Llano Realty Partners to get an opinion of value for your property – it may be worth more than you think.

Commercial Real Estate, Industrial Real Estate, Retail Real Estate

The Evolution of Logistics in Retail

When you consider its fundamentals, most retail is simply a distribution center providing goods and services to individuals. Consumers enter the retail facility or drive-thru line, obtain their good or service, and return to home or work.

Even prior to the COVID-19 pandemic, e-commerce and innovation has changed the way retail goods and services are distributed to consumers. Uber Eats, Favor, Door Dash, HEB Curbside, Target Drive-up and myriad other examples showed that Americans wanted their products on demand more so than ever.

Now that consumers are confined to their homes, the use of these services is not a convenience but often a necessity. Although there is no way to predict how consumer preferences will change in response to a global pandemic, we do know that, according to Eccie Newton of Karma Kitchens in the Bisnow article, “a lot of people who have never used delivery will be introduced to it for the first time, and I think they will continue to use it.”

As the delivery and curbside trend accelerates into a new norm, retailers will continue to operate as (and potentially resemble) distribution centers for their customers. Like Karma Kitchens in London, this could result in a hybridization of retail and industrial/flex as retailers evolve into their own last-mile distributors.

https://www.bisnow.com/london/news/retail/the-we-get-our-food-may-change-forever-103643

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