Mr. Bezos goes to the mall (maybe)

The next phase of the retail mall revolution, from shopping to shipping, just got a big push forward.

The Wall Street Journal reported late Sunday night that Inc. (NASDAQ:AMZN) is negotiating with real estate giant Simon Property Group (NYSE: SPG) to transform some of Simon’s department store properties into fulfillment centers by assuming anchor tenant spaces once held by major but now struggling retailers. According to the Journal, the talks have focused on J.C. Penney and Sears, which have both filed for bankruptcy protection. Simon malls have 63 J.C. Penney stores and 11 Sears stores, according to its most recent public filing in May.

Until now, Amazon’s mall leasing or acquisition activity has been on a one-off basis; Marc Wulfraat, head of consultancy MWPVL International, said he could recall only three such transactions, all of which have been in Ohio. A deal of this nature with Simon would put Amazon in the retail-to-industrial conversion business in an unprecedented way.

For Amazon, the move makes tactical and strategic sense. The company needs at least 50% more fulfillment and distribution capacity in place by the holiday peak period to manage what is expected to be an unprecedented combination of seasonal activity and the impact of the novel coronavirus keeping many consumers away from brick-and-mortar stores and in front of their digital devices. Amazon CFO Brian Olsavsky said on a recent analyst call that capacity expansion is the company’s second-most important priority behind employee health and safety. Amazon has fallen behind on one-day deliveries of Prime orders due in part to a shortage of distribution center space.

Strategically, Amazon sees mall development as a way to shape consumer behavior to expect deliveries based on precision as much as, if not more than, speed, said Brittain Ladd, a top Amazon executive during the last decade and head of an e-commerce consultancy. The broader the physical network, the easier this transition can be accomplished, Ladd wrote Monday in a LinkedIn post.

“Instead of delivering to places, Amazon will deliver to people regardless of where they are. Eating lunch and want something delivered? No problem. Amazon will deliver it in 30 minutes. Need medication for a sick child? No worries. The medication will be delivered in 15 minutes.”

Ladd repeated what he and others have said before: that Amazon will apply its cloud-based model, AWS, to great effect in supply chain management and logistics. “In other words, Amazon will move beyond fulfilling its own orders and instead, will sell their logistics prowess to manage entire supply chains for major corporations, including retailers,” he wrote.

Few companies are currently capable of competing against Amazon, Ladd said, adding that the number that can will continue to dwindle. By mid-decade, it will be “game over” for most retailers, he said.

The trend toward retail-to-industrial conversion has been in place for about three years. One of the catalysts was Amazon’s decision around that time to lease space for an 855,000-square-foot fulfillment center on land where Cleveland’s Randall Park Mall stood. The mall, billed as the world’s largest in the 1970s, fell on hard times due in part to the growing e-commerce phenomenon. By the time Amazon got there, the mall had been long closed and mostly demolished.

About 59 such conversion projects have been completed, are underway or have been proposed since 2017, up from 24 in 2019, according to data published late last month by CBRE Services (NYSE:CBRE), a real estate services firm. The 59 projects total approximately 13.8 million square feet of retail space converted to 15.5 million square feet of industrial space, according to CBRE data. 

That’s a drop in the bucket considering that the U.S. has 10 billion square feet of warehouse and distribution space. However, the trend is expected to accelerate as the e-commerce shift and the pandemic put extreme financial pressure on department stores, and mall owners desperate for consistent cash flow seek alternate tenants. Industrial capacity, which includes logistics, is the only area of commercial real estate that’s currently growing.

Traditional malls were seen as endangered species long before COVID-19. A mid-2017 study by investment firm Credit Suisse predicted that up to one-quarter of all malls could close by 2022 as sales of apparel — a mall’s bread and butter — shift online.

There is currently a surplus of mall space. CBRE’s mall “availability” rate, which measures vacant mall space and occupied space that’s being re-marketed to prospective new tenants, stood at slightly under 6% in the second quarter, up 20%-25% from levels of four or five years ago.