I recently completed appraisals of two large industrial buildings in Tennessee. They were leased and occupied by an international company. What interested me about these assignments, and what should interest you too (especially if you own commercial real estate), is the impact multichannel retailing is having on the value of these and other types of buildings.
The fact is, that the world as we know it has changed.
More and more of the products we consume are purchased over the internet. And it’s affecting the value of all types of commercial real estate. Here’s a chart showing recent E-commerce trends.
Smart companies, aware of this trend, are finding better ways to deliver high quality goods more efficiently and more affordably. You and I are the beneficiaries. Now, instead of being forced to face bitter cold winds and navigate endless aisles of a vast array of products, you and I can order exactly what we’d like from the comfort of our homes and have it delivered to our doorstep. More and more people are doing just that. Here’s another chart showing the slow, agonizing downward trend in department store sales.
So what’s your point?
I’m glad you asked.
The point is this: In their efforts to streamline the delivery of products from point A to point B, companies are discovering that it’s much less expensive to temporarily store and deliver goods from a distribution facility (that costs $50.00 per square foot to build) than for their goods to be gathering dust on a shelf in a department store (which costs over $100.00 per square foot to build) where fewer and fewer people shop.
One impact on the value of commercial real estate has been an increasing demand for industrial space. Another is the challenge it presents to retailers being forced to reconsider how to integrate their retail stores into their distribution chains. This article from CoStar provides an insightful discussion of recent trends. Would it surprise you that this property type has recently outperformed all other property types?
One threat to the robust demand for industrial space is the increasing strength of the dollar.
“How’s that?” you ask. The answer may surprise you…but I’ll save that discussion for another day…
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Excellent article, borther. I like the FRED chart, too. Didn’t know about that one.
Thanks Wyatt!
It will be interesting to see how leased fee and leasehold interests in retail space will be affected and to what degree.
Alan, that’s a very insightful comment – I’m trying to remember the details of a class discussion at an AI convention in Austin two years back about that very topic. What happens when changes in market influences result in a significant gap between a long term lease rate and a market rate? Excellent food for thought and further discussion…
Thanks bro! I think it would also be cool to see the outcome of highest and best use on those property types as well. Typically if a large retail box in our area goes vacant, it’s donated to a church or becomes a vendors mall, lol!
I think Wal-Mart is a prime example of this Russel. They’re closing 154 stores in the U.S. and say they’re focusing on “strengthening Supercenters, optimizing Neighborhood Markets, growing the e-commerce business and expanding Pickup services for customers.” http://news.walmart.com/news-archive/2016/01/15/walmart-continues-sharpened-focus-on-portfolio-management
I’m interested in hearing what you mean about the threat of demand of industrial space. Sounds like merchant builders are fixing to saturate the demand of industrial property?
Seth, thank you for the comment. Walmart is a great example of a company that has excelled at streamlining their distribution system. Amazon as well. Walmart has been dabbling in reducing the footprint of their stores in their shift towards the growth in E-commerce.
With respect to my comment on the strength of the dollar – we know that a strong dollar increases the cost of our goods, making them expensive relative to goods in other countries and reducing exports – decreasing the demand for industrial space.
One of my favorite quotes (not sure who said it first) is that “excess profits breed ruinous competition”. Over the last year or so I have noted the construction of speculative logistical space outside of Louisville and Nashville – a welcome sign following the recession. But I think the additional supply combined with a strengthening dollar will limit the upside for industrial space.
Again, thanks for the comment, Seth. It’s always a pleasure to interact with sharp minds.