Blaine Kelley, senior vice president with CBRE, reviews the major changes that the retail real estate marketing is experiencing, and the many criteria that retailers must consider when engaging in site selection.

SCB: What are the dynamics of the retail market today with regard to distribution and warehousing?

Kelley: Our industry over the last five to seven years has seen a massive proliferation of big-box distribution facilities, to ensure that product is delivered same day or next day. Approximately 50% of all new warehouses being delivered in North America are driven by e-commerce. The market has been very robust, and we expect it to continue to be so because of this massive transformation of the supply chain.

SCB: That’s interesting, because e-commerce's actual percentage of retail sales is nowhere near 50%, but so much of the action in warehouses is nevertheless going on in that area.

Kelley: It represents a disproportionate share of the actual economy, but at least half of the activity is underpinned by e-commerce growth, which is very out-sized.

SCB: So big stores require big D.C.s?

Kelley: They do, and as the distribution point gets closer to the customer, they’re carrying more SKUs and a wider array of inventory in order to deliver more quickly.

SCB: Is that why we're starting to see these giant new warehouses showing up in the middle of urban areas?
Kelley: Yes. They’ve sort of been lurking on the perimeter of metro areas, and the closer they can get to a population center, the faster they can deliver.

SCB: As the price of real estate in cities goes up, how does that affect the cost calculation of these gigantic facilities?

Kelley: It’s a major shift in capital investment by a traditional low-margin retail business. It’s part of the infrastructure and billions of dollars that supply-chain officers are asking from their boards, to deliver product faster and move away from a traditional brick-and-mortar store strategy to the online experience. It's an investment in that sales channel.

SCB: At the same time we hear about large warehouses showing up in urban centers, they’re being accompanied by a proliferation of microfulfillment centers that they feed — sometimes located within actual brick-and-mortar stores. Is that also part of the network trend right now?

Kelley: It is. It's in its early stages. Urban logistics has been around since the U.S Post Office. As far as the location of facilities, they're landing in old retail stores, shopping centers, former apartment buildings and multi-housing, all of which are being repurposed for last-mile delivery.

SCB: One possible solution for retailers is the repurposing of malls that are closing — the creation of so-called dark stores. Is that a big factor?

Kelley: It's still anecdotal today. But absolutely, the old mall of yesteryear, which was announced with such fanfare in the 70s and 80s, is very well located and has great parking. The physical building would probably have to be repurposed, but we’ve seen that, and I think we'll continue to experience more of a transformation there.

SCB: To what extent are these facilities moving into areas that were previously zoned for commercial distribution, versus those that were previously residential?

Kelley: A little more of the latter. Residential is where the people are. Industrial-zoned areas are historically on the exurbs, the edges of town. There's a bit of a tug of war between the two — you might have a major regional facility outside of town, or maybe an urban distribution point right in town, or as close as you can to a population.

SCB: Do you get pushback from residents who continue to live in that area, and what challenges do you have there? Noise, trucks, traffic, lights, dust?

Kelley: There are definitely some headwinds now from local municipalities. They all want jobs, but there's a push for higher wage levels, and they don't want the truck traffic, hours of operation, or overnight shifts. It's very case by case, by each geography as to where you can land one of these facilities. No one location fits all of these operators —it's definitely a process. I call it the art of the business.

SCB: How then do retailers go about doing site selection, with all of the criteria they have to keep in mind?

Kelley: There’s the old model of a fancy math logarithm of transportation costs, inbound and outbound. Then you overlay some smart demographic and geospatial analysis for road access. The big one today is labor. Many of these metro areas have seen 2% to 4% unemployment rates, so it's really a composite, almost like a mosaic of transportation, labor, available land and location of the building. We operate as close to that dot on the map as possible, with a lot of trade-off analysis. That's the way it works.

SCB: You’ve got to be close to the customer in order to enable one-day or same-day service. So you see this trend continuing?

Kelley: I do. The expectation in our consumer economy radically changed 10 years ago. Distribution networks are only beginning to modernize, and it takes a long time to meet that demand. There have been some major seismic shifts in the last 10 years, with the Panama Canal opening up. I continue to see forward investment in that, especially as e-commerce within retail becomes a bigger and bigger piece of the pie.