Conversion of retail space to logistics use ‘will be small’ – Prologis

Prologis facility in Jackson, Georgia

In a research report, San Francisco-based real estate investment trust Prologis Inc. (NYSE: PLD) says there are significant headwinds involved in converting retail space to logistics throughput centers.

COVID-19 has forced many traditional brick-and-mortar retailers to further adopt e-commerce solutions, with many looking to transform existing retail stores with low foot traffic into digital fulfillment centers.

However, the report suggests that retail conversions “will be small, amounting to 5-10 million square feet per year over the next decade,” accounting for less than 5% of last-touch facilities, less than 1% of logistics facilities and less than 3% of annual new logistics real estate construction in the nation’s top 25 markets. The conversions are also expected to account for just 5% of the new logistics space needed to meet 750 million square feet of incremental demand created by increased inventories and e-commerce fulfillment.

The company’s exact estimate calls for total retail-to-logistics conversions of 77 million square feet over the next decade out of a total of 7.5 billion of potentially eligible square feet of malls, outdoor shopping centers and strip retail across the U.S.

The report said COVID-19 “has pulled forward five years of expected online sales growth into just five months.” U.S. Census Bureau data published in August showed adjusted domestic retail e-commerce sales increased 32% sequentially during the second quarter to $212 billion, 45% higher year-over-year. E-commerce accounted for 16% of total U.S. retail sales during the quarter, up from less than 11% in the second quarter of 2019.

Prologis is forecasting online sales to reach $340 billion globally this year, with the share of U.S. retail goods sold online increasing to 25% by 2024.

The company says e-commerce requires roughly three times the logistics real estate space of traditional distribution and that the higher share of revenue coming from goods sold online “will require multi-channel retailers to make new and material investments in their supply chains, including new reverse logistics to handle return volumes.”

The report also highlighted several headwinds to accomplishing retail conversions. The best repurposing of a retail property may not be logistics given the per-square-foot disparity in rents. Often, retail complexes are converted into higher-yielding uses like residential homes, offices or hotels.

Additionally, many existing logistics submarkets are usually located in close proximity to retail and offer favorable rents and facilities that are better equipped to handle larger supply chains. In many cases retail properties are not designed or able to be reconfigured to reasonably serviceable logistics real estate.

Community opposition around rezoning to allow increased truck traffic and political opposition to a potential loss of sales tax revenue were also listed as concerns. Further, the larger retail sites have more stakeholders — multiple owners, equity and debt holders, and other tenants — prolonging negotiations by years.

The report shows that enclosed-mall conversions are likely to be commonplace given increased vacancies. However, it noted that the process can be difficult and may yield only “low levels of new logistics” space. Total mall conversions to logistics space, including mall anchor stores, are expected to be between 13 million and 26 million square feet.

Freestanding retail, the biggest retail category in the U.S., could provide the largest conversion opportunity. The report doesn’t expect to see much conversion of open-air shopping centers, or strip malls, as those retailers are usually in better financial health. The relatively small site sizes aren’t practical either. The company’s forecast calls for the conversion of 22 million to 66 million square feet of freestanding retail space.

Prologis’ industrial real estate portfolio exceeds $90 billion in gross book value and total expected investment. The company’s nearly 1 billion square feet of owned and managed properties spans 19 countries, serving 5,500 customers. Many of its warehouses in the U.S. service ports on both coasts, regional distribution hubs, and rail and intermodal facilities.

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