Fitch: E-commerce fulfillment, retail locations are converging

Dive Brief:

The growth of e-commerce and the increasing emphasis on delivery speed and in-store pick-up is precipitating a convergence of industrial distribution and retail real estate, according to a report from Fitch Ratings emailed to Retail Dive.
As e-commerce continues to grow at the expense of brick-and-mortar retail, leading to tenant and retail property softness, the future of shopping centers and lower-quality malls is in question, but well-located retail properties and REITs with portfolios centered on consumer demographics will experience continued demand as centers for delivery and pickup services, according to Fitch.
As a result of the shift, lenders, investors and operators must refocus their attention to demographics, Fitch warned. When it comes to last-mile retail distribution, underwriting on location based on consumer demographics may become as meaningful as in-place net operating income, according to the report.

Dive Insight:

At this point, many retail stores / warehouses and e-commerce last-mile distribution centers essentially serve as distribution or staging of goods for sale to the end user: One has a delivery focus without public access, the other has public access without a delivery function, Fitch noted. “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,” Fitch said.

Owners of retail locations optimized as delivery and pickup locations will likely win in this environment. Because retailers and e-commerce distribution facilities are serving such a similar service — getting goods to customers — both should be analyzed similarly, according to Fitch. Mall values have long been measured by their proximity to population density and an area’s per-capita income, and that applies to any site’s ability to draw from consumer traffic and buying power.

“The old real estate axiom, ‘Location, Location, Location’ applies, possibly now more than ever,” Fitch said.

As last-mile operations continue to evolve, including employing ride-sharing services like Uber and, eventually, self-driving cars, REITs are contemplating the possibility of having excess parking and retail space; those could be converted to delivery and pickup areas. Zoning authorities will also have to contemplate changes, or risk contending with blighted centers and the loss of jobs and tax revenue, Fitch warned. To smooth that, real estate owners should find ways to make mixed-use retail / distribution sites palatable for residents, according to the report.

E-commerce is also forcing mall landlords to find new ways of calculating their centers’ and their tenants’ productivity — as should their tenants themselves, says Hongwei Liu, co-founder and CEO of wayfinding technology firm Mappedin. “Traffic as we all know is only going in one direction, but revenue is going up,” Liu told Retail Dive earlier this year, noting the value of traditional store and mall metrics is “breaking down because of accounting, not because of Amazon. When the customer wants red jeans instead of blue, and comes in and tries them on the store and orders the red — you know that your store created that value. That’s where productivity is."