Fitch: ‘Location, Location, Location’ still applies, possibly now more than ever
The growth of e-commerce and the increasing emphasis on delivery speed as well as pick-up services for retail goods will likely precipitate a convergence of industrial distribution and retail real estate.
Ongoing changes for retail real estate and industrial/distribution space have put the future role of shopping centers and lower-quality malls in question. E-commerce continues to take share from bricks-and-mortar retail, resulting in tenant and retail property softness. We believe well-located retail properties and REITs with portfolios centered on consumer demographics will see continued demand as delivery and pickup services and an increased focus on demographics gain momentum.
Retail real estate sites and e-commerce last mile distribution sites now essentially serve the same purpose -- the distribution (or staging) of goods for sale to the end user. One has a delivery focus but without public access, the other has public access but without a delivery function. Retail centers that exhibit the best demographics, which include per capita income and population density, will be most easily repositioned and most capable of managing the secular shift in how goods are sold and purchased in the 21st century.
Owners of infill retail locations that can also function as delivery and pickup locations will likely be winners as this convergence accelerates. The need to distinguish between an attractive retail or last mile distribution site -- zoning notwithstanding -- will become less meaningful as the function of the real estate is the same: providing a way to distribute goods to customers. The old real estate axiom, "Location, Location, Location" applies, possibly now more than ever.
Community shopping center and regional mall values have historically been measured by their proximity to population density and the region's per capita income. While these measures will continue to determine the attractiveness of a site, last mile distribution and pickup purposes will also be considered in drawing consumer foot traffic and buying power.
In a rapidly changing retail world, lenders, investors and operators will have to refocus their attention to demographics. When it comes to last mile retail distribution, underwriting on location (based on consumer demographics) may take on as meaningful importance as in-place NOI.
With the advent of Uber and ride sharing and the eventual development of self-driving cars, some REITs are discussing what they can do with potential excess parking facilities. Depending on zoning and the configuration of a shopping center, using excess parking facilities or underutilized retail space to develop small scale last mile delivery and pickup distribution facilities may be an option.
If the alternative is an antiquated or failing center in a municipality, zoning authorities and their communities will eventually be compelled to consider zoning changes allowing small scale distribution facilities at current retail zoned sites or face the prospects of a blighted center, lost jobs and tax revenue. Fitch expects real estate owners will find ways to make mixed-use retail / distribution sites palatable for residents.