Jake Terkanian, executive vice president of CBRE, explains the challenges that distribution centers are encountering today in meeting the demand for new capacity.

The commercial real estate market for distribution centers and warehouses is currently experience a significant constraint in supply, Terkanian says. Barriers to development including difficulties in tapping financial markets for the working capital to build new facilities, and local grassroots resistance to new development that would result in heavy truck traffic.

“It’s a challenge all over the U.S.,” Terkanian says. “The industry is having to take more creative approaches to get land to build [on].”

Not every new DC has to be a greenfield project. Developers are also looking to convert or demolish existing office space, demand for which has plummeted because of the COVID-19 pandemic. That’s an especially attractive option in markets where land is expensive, Terkanian says.

When it comes to converting office space to industrial warehousing, the underlying zoning is already in place. But for the most part, developers still must ask for conditional use permits to reflect the needs of a distribution operation — especially the steady flow of trucks that will result.

Another option is to turn existing retail space into “dark stores,” functioning entirely as fulfillment centers. There, however, developers might face restrictions arising from the design of shuttered retail operation, with ceilings too low or structures not built to accommodate the everyday activity of a warehouse. For that reason, there’s more of a trend to demolish a large store or mall and replace it with an entirely new distribution facility.

Even existing warehouses might need heavy refitting to employ modern-day technology, including new material-handling systems and other types of automation. What’s more, developers must design facilities not just for the moment, but to meet the needs of the future. “It’s a new ballgame,” Terkanian says.