CBRE report takes a deep dive into U.S. retail-to-industrial conversion projects

Going back to mid-March, when the ongoing COVID-19 pandemic really took hold, it has been hard to overlook the ubiquitous presence of online shopping, or e-commerce. As we all know, the reasons for that are evident, with people driving and going to stores less often, among others.  

That has been felt, for sure, in the commercial real estate sector, too, with demand remaining strong for e-commerce and last-mile logistics-driven warehouse and distribution space, to be sure.

That was made clear in a research report issued this month by Los Angeles-based industrial real estate developer CBRE, entitled “Retail-to-Industrial Property Conversions Accelerate.”

The main thesis of this report explained that 13.8 million square feet of United States retail space has now been converted to 15.5 million square feet of industrial space. But that is not solely a COVID-19 happening, as that data goes back to 2017, according to CBRE.

As for that data, CBRE found that there have been 59 retail-to-industrial conversion projects, which have been completed, proposed, or are underway, going back to 2017, which CBRE said is far above the 24 recorded in January 2019, with 40 of these projects being conversions or adaptive reuse and the other 19 properties demolished for new construction. 

“Underperforming retail sites have become an ideal location for last-mile warehouse developers,” the report noted. “They are often located within population centers, connected to utilities and have large parking lots with multiple points of ingress and egress. Many are also freestanding big-box stores with existing dock doors and clear heights compatible with industrial use. Those without compatible design formats are typically demolished and replaced with modern warehouse facilities.”

As for the future, the report pointed to key Midwestern markets—in Milwaukee, Cleveland, Chicago, Omaha, and Dallas/Ft. Worth—as representing one-third of national conversion projects, due, in large part, to what it called a significant number of what the firm called “dead malls.”

And this has the potential to expand to the Southwest and West, driven by “the changing tide of retail, the growth of online shopping and the steadily increasing demand for industrial space [to] extend this development strategy.”

And, of course, how COVID-19 fits into all of this cannot be overlooked, due to stay-at-home orders, CBRE said that these orders have brought about what it called an “entirely new customer base to e-commerce.” That was made clear by data from Adobe cited by CBRE that showed April and May online sales were up 7% compared to the 2019 holiday season and a whopping $52 million over normal April and May online sales.

“The disruption to the retail sector and the growth of e-commerce will continue to increase the viability and payback of retail-to-industrial property conversions,” wrote CBRE. 

These retail-to-industrial property conversions have shown increasing strength since 2017 and show no signs of letting up. Since the pandemic took hold, saying things have changed, or are changing, on the logistics front, could very well be considered as the logistics’ understatement of the year, and while these conversions could very well be viewed as commonplace in the coming years, it is still somewhat emerging now.