5Qs for John Morris on the merging of retail and industrial real estate

Four segments of real estate have long been distinct: office, residential, retail, and industrial. But dynamic changes in purchasing patterns and societal interaction—intensified by a global health crisis—have moved CBRE, the world’s largest real estate services company, to put industrial and retail together under one roof. It’s as if the United Kingdom merged Ireland and Scotland under a single government. John Morris, former lead of industrial supply services at Cushman & Wakefield, heads the newly formed unit and tells how and why it happened.

John, why are the two sectors being aligned?
It appears as if COVID influenced it, but we’ve been talking about bringing the two businesses together since last year. How accomplished retailers can meet inventory requirements and service levels in e-commerce operations is a challenge that requires alignment of retail and industrial strategies. It’s risky at this point to manage those two real estate platforms independently. Where you put your inventory depends on where you’re customers live. So you might put your inventory in a store, or it might be in a depot, or it might be in a warehouse. Wherever a retailer needs fulfillment, the two property types are going to be dependent upon one another.

So have changes in the retail marketplace caused a profound change in how retailers need to plan their retail footprints?
In the past, real estate development would be based on what the investor would accomplish and not by looking at a site and saying, “This is what this spot on the earth wants to be and this is the best-expected use of that property.” Higher-and-better use has long been an after-effect strategy. But now it’s an analysis that will be done before any shovel is put in the ground. You’ll look at demographics, cell phone usage, and income and undertake the future mapping of a location as a revenue-generator. We’re also developing a science around potential industrial properties. How many e-commerce shoppers are there in the area? How much and what do they buy?

Several big mall owners are planning to put distribution centers in vacant anchor store spaces. How will retail and warehouse co-exist?
This is going to be a big issue in retail conversions. You’ll want more inventory in those stores in areas where e-com purchasing is high, but there’s the NIMBY factor. Do people want a logistics center in their mall? Will the local zoning board approve? Municipalities will govern how much of these conversions happen. But it’s a big deal for retailers because boxes being delivered to every customer’s door is very expensive. If you own and manage a mall and a third-party logistics company comes in and says, “Let us take that empty space and fill it with the entire inventory in your mall and consolidate it and ship it more affordably,” you’re going to try and do it. We’ll see a future where all malls have a fulfillment center.

What advantages and disadvantages will they pose to in-line retailers?
The advantage to retailers is you share an outbound freight ride with others. The advantage to the customers is that it might improve their delivery and return experiences. It’s an added service. “Stop at our mall. We have a shipping center. You don’t have to take the package to a parcel service.” Modern shoppers are very comfortable with integrating fulfillment with retail sites. Some of the physical retailers that are more sophisticated with omnichannel are testing concepts. Best Buy is really talented with supply chain and is changing some formats to align shopping with shipping.

Is the merging of retail and industrial real estate strategies crucial to the survival of both brick-and-mortar retailers and DTC brands in the new retail age?
Brick-and-mortar retailers will survive by building out their own e-commerce fulfillment platforms, by doing it with flexibility and scale and putting inventory in the right places. They’ll survive by letting customers enjoy the alignment of the store experience and the online experience through the customization of the delivery process. Clearly, the great e-coms will look to create great physical store experiences. Over the next five years we’ll see e-commerce and brick-and-mortar brands meet in the middle where they’re both. I don’t think everyone’s physical retail footprint will shrink.