When Retail and Industrial Collide

Industrial folks, get ready—it's going to be a record-breaking year, thanks to the ever-growing e-commerce trend. (Who knew your online purchases of oven mitts would be so important?)

Cassidy Turley research guru Garrick Brown (at BOMA International's conference, where our Houston reporter has spent the last four days) says industrial is on its way toward 150M SF to 160M SF in occupancy expansion this year. It all boils down to retail's biggest game changer: the race for same-day delivery and the mega distribution centers that follow. To put it in perspective, Garrick says 1M SF is roughly the same size as 40 football fields. (We're gonna need a bigger tailgating grill.) And Amazon currently has 56M SF of distribution space in the US, with the intent to grow to 90M SF by 2016. Only 40M SF of the nearly 21B SF of industrial space is suitable for modern users, he says, so expect 40M SF to 70M SF of demand over the next three years.

Retailers like Nordstrom are researching multiple distribution centers versus one giant centralized location, while others, like Macy's, are toying with the idea of using old, underperforming stores as mini distribution hubs, Garrick says. And Kohl's has shifted capex toward its e-commerce platform and supply chain in response to the growth, he says. E-commerce accounts for 6.2% of all retail sales right now, so that means there's still lots of room for growth, he explains—FTI Consulting pegged that number to jump up to 14% by 2021. The prevalence of tablets is only fueling the fire.

Despite this, shopping center vacancy in the top 20 markets averages below 7%, Garrick says—and in the top 60, only seven experienced vacancy upticks in Q2. Class-A space tops retailers' lists, so managers of Class-B need to be concerned—the loss of only a few key tenants can turn you into a C. Among the retailers growing: small-format grocery, pet supplies, fast/fast-casual dining, upscale dining, and fitness/health/spa tenants. And we can't forget dollar stores, which are growing at the rate of one store every 4.8 hours. He says retailers need to embrace the omni-channel (merging bricks and clicks). Sur La Table, above, is a good example: When you shop in store, they get you on their email lists, and then entice you back with cooking classes.