ATLANTA — While the development pipeline for industrial real estate is at peak capacity, retail’s new store inventory is taking a back seat. Paul Xhajanka, division real estate manager of Kroger, said that his company is breaking from the past when it would open hundreds of stores a year.
“If you look at our store count for the next three to five years, we’re only going to open 20 to 25 stores across our various platforms,” said Xhajanka, referring to Kroger’s portfolio of grocery brands, which include Mariano’s, Harris Teeter and Ralphs. “Target is opening 10 to 20 smaller stores a year, and even Walmart is down to 10 stores a year. All of us are shrinking our inventory of new stores down. Retailers are building more distribution centers, not stores.”
Xhajanka’s comments were made during the “Industrial Brokers and Expanding Retailers” panel at the first annual Intersection of Industrial and Retail in the Southeast conference, held Thursday, Aug. 23 at the Westin Buckhead in Atlanta. Sponsored by InterFace Conference Group and Southeast Real Estate Business, the half-day event drew more than 170 industrial and retail real estate professionals across the Southeast.
Retailers, along with global companies like Amazon and Wayfair, are the primary participants in the e-commerce sea change. According to most retail reports, e-commerce sales total between 9 and 10 percent of all retail sales, but some economists put that total closer to 13 percent.
Like most major retailers, Walmart is opening more distribution and fulfillment centers than new stores.
Whether or not it’s 9 or 13 percent, what’s clear is that e-commerce sales are increasing. Over the past five years e-commerce sales have grown at an annual rate of 15 percent compared to 2 or 3 percent for brick-and-mortar retail sales. Last year, e-commerce sales totaled $409 billion, and this year CBRE predicts sales will total $461 billion.
Chris Riley, vice chairman of CBRE’s Atlanta office and a panelist at the Intersection conference during the capital markets panel, says that for every $1 billion increase in e-commerce sales, a corresponding 1.25 million square feet of industrial space is required to handle the demand. For this year, an additional 65 million square feet of industrial space would be needed to support e-commerce’s expected $52 billion increase in sales.
“E-commerce can’t be replicated, it’s the most transformational demand driver that we’ve ever experienced,” said Riley about the overall industrial market, which is now seen by many as commercial real estate’s premier property type.
“It only took us 30 years for industrial to be the belle of the ball when you look across the four big food groups.”
Retailers are some of the most actively expanding industrial users, especially in the big-box distribution space. This week alone, prestige retailers have announced several major industrial projects across the country. These include Walmart announcing a $41 million center in Kentucky’s Bullitt County to fulfill online orders; The Container Store inking a deal for a new 600,000-square-foot distribution center in metro Baltimore; Best Buy signing a 500,400-square-foot lease near Baltimore to distribute products to its Mid-Atlantic stores; and Ross Stores leasing 1 million square feet of industrial space near Bakersfield, Calif.
Hibbett Sports, a Birmingham, Ala.-based sporting goods retailer with more than 1,000 stores, is expanding its distribution center south of Birmingham to include a fulfillment center. Tony Lago, vice president of logistics for Hibbett Sports, said retailers are taking on more industrial space because the breadth of their inventory is so large and reaching their customers efficiently is becoming more crucial now that shopping preferences have changed.
“The newer generation wants instant gratification, they want to receive their package very shortly after they order it,” said Lago. “Industrial space is needed to provide everything to everyone at any given time. We still have a bit of a gap to fill before we get there.”
Retailers Stretch to Reach Customers
In addition to its new distribution center near Louisville, Ky., Walmart has taken great pains to expand in order to reach its customers, but not by the traditional method of opening new stores. The Arkansas-based retailer recently closed on its purchase of Indian e-commerce platform Flipkart and has aligned with a variety of partners, such as healthcare benefits provider Anthem, e-books retailer Kobo, robotics firm Alert Innovation, Detroit-based outdoor specialty retailer Moosejaw and celebrity Ellen DeGeneres.
Retailers like Walmart are innovating in an effort to both maintain their loyal customer base and increase market share. Delivery and logistics are a key component of the puzzle, especially for the major retailers.
In late 2017, Target acquired Shipt, a grocery delivery startup based in Birmingham. The move has helped Target improve its logistics to the point where it can offer same-day delivery in metros across the country.
Kroger announced this summer its partnership with Nuro, an autonomous vehicle startup for a “robo-delivery” service. Retailers like Kroger are thinking years ahead in order to anticipate the rapidly changing world of consumer shopping.
“The internet provides whatever you want, wherever you are and whenever you want it — that’s a huge paradigm shift,” said Kroger’s Xhajanka.
Earlier this year, Kroger struck up a partnership with online grocery delivery service Ocado. The British company uses robotics to process and fulfill grocery orders at its fulfillment centers, and Xhajanka says that the initiative will add to Kroger’s industrial presence.
“We’re going to be building at least three new distribution centers this year,” said Xhajanka. “That’s how we’re adapting to change: more distribution and fulfillment centers, as well as last-mile facilities in the communities we serve.”
Solving the last-mile conundrum was a frequently mentioned topic at the Intersection event. Panelist Matt Powers, executive vice president of JLL’s retail and e-commerce distribution division, says that education is sorely needed at the community level to get these last-mile facilities closer in to the population centers, which will ultimately help consumers get their products quicker.
“Communities need to accept zoning for modern truck terminals to help fulfill last-mile,” said Powers, who formerly worked at Walmart and was part of the team that helped roll out the company’s network of distribution centers. “These aren’t the truck terminals of the past, it’ll be smaller boxed trucks and vans servicing those [facilities].”
Lago of Hibbett Sports said that retailers are also using their physical stores to help solve the last-mile hurdle.
“We try to utilize every store for deliveries to minimize distance and cost,” said Lago.
Cold Storage is the Next Hot Ticket
According to CBRE’s Riley, grocers comprised about 35 percent of all food sales in the United States last year, and only 3 percent of grocers’ sales were made online, including through apps like Instacart. But with Amazon’s purchase of Whole Foods Market last year, Riley thinks there is clearly enough runway for grocers to move more product online.
“We’ve not seen this space take the same runway that we’ve seen for e-commerce in terms of hard and soft goods,” said Riley. “Amazon bought Whole Foods Market for a reason, they didn’t pivot into the grocery sector without a plan.”
A key component of this shift is cold storage facilities. Food purveyors like restaurant groups and supermarket chains make up the bulk of the tenancy of cold storage facilities, but the space isn’t as built out because developers aren’t encouraged to build it speculatively.
“No one builds spec cooler space, it’s too expensive,” said Riley. “It’s all been build-to-suit for the most part and that space has a 3 percent vacancy rate nationally.”
Demand is high for new cold storage space, so much so that developers are starting to build the specialty facilities on a speculative basis. Hunt Southwest recently broke ground on this 300,000-square-foot cold storage facility in Fort Worth, Texas.
One of the main reasons behind this trepidation is that lenders aren’t yet comfortable with the product type. There’s considerable lease-up risk and the required equipment makes these projects more expensive to build and operate than a typical industrial facility.
“Clearly there’s a driver for cold storage space, but anytime you’re lending on specialty properties you have to think about how much work you’re going to have to do to convert the property back to a distribution center if the cold specialty tenant leaves,” said Gary Bechtel, president of Money360, during the capital markets panel. “Any specialty space is problematic to finance, whether it’s biotech space or cold storage.”
Gregory Krafcik, vice president of Walker & Dunlop, expects lenders will eventually get excited about the product type, but says that it may take a few years to get to that point.
“Lenders aren’t good with innovative property types like cold storage, it takes awhile for them to get there,” said Krafcik. “As the space continues to transform, you’ll see more lenders get comfortable.”
Because of the increased demand for cold storage, some developers are taking on the financial risk to get these projects off the ground. In early August, Hunt Southwest broke ground on a 300,000-square-foot cold storage facility in Fort Worth, Texas. The project will feature 45-foot clear heights and will have the capacity to be served by rail.
In build-to-suit news, Publix recently announced that it has selected Greensboro, N.C., for its $300 million distribution hub to service stores in the Carolinas and Virginia. The refrigerated distribution center is scheduled to come on line in 2022.
JLL’s Powers says that more projects like these will be needed in the years to come as the big grocers and e-commerce companies are demanding more of the space.
“Walmart and Amazon would love to have spec cold storage on the market,” said Powers. “Companies haven’t gotten to the point where they’re doing a hard push, but that’s definitely coming because there’s demand.”
— John Nelson