5Qs for Steve Backman on the paucity of fulfillment space

Al Urbanski
Real Estate Editor & Manager
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Steve Backman

CBRE released a report a few weeks ago that should have caused a pause in the proceedings of national retailers expanding their omnichannel operations.

Industrial real estate space needed for fulfillment of orders is hard to come by. Expensive, too. It’s rising at a 10% clip in 22 major markets. We thought the perfect person to offer advice to fulfillment-space-hungry retailers was Steve Backman.

A civil engineer with 20 years’ experience in commercial real estate, the founder of BH DevCo has worked on everything from market analysis to site acquisition to the construction of millions of square feet of industrial space in the West and Midwest. His chief advice: Be cautious.

Steve, industrial space is the hottest commodity in real estate now. Not enough new stock is under construction and half of it is already spoken for. What’s an omnichannel retailer to do?

When Amazon, FedEx, and third-party logistics companies are having trouble finding affordable high-quality industrial space, brick-and-mortar retailers are going to have to work hard to find creative alternatives. Some are buying land further away from population centers, and some are refurbishing existing facilities that are currently just distribution centers. Others are killing two birds with one stone. They’re consolidating their brick-and-mortar square footage and converting buildings or parts of buildings into an online-order fulfillment facility.

I saw a study this week predicting that 20% of the huge increase in online shopping during the pandemic will continue. Is that a good number for retailers to use in establishing a new normal?

Predicting what the new normal will look like when the pandemic is behind us is a tricky proposition. It’s still not clear how much of this is indicative of a long-term shift in consumer behavior. While belts are tight for more than a few retail segments right now, many brands and businesses have clearly done the math and determined that they simply cannot afford to be behind the curve--especially for those that were slow to embrace online shopping. COVID has now essentially forced their hands.

COVID put retailers in a real estate pickle, right? They don’t need as much mall space, but they need a lot more industrial space.

Most of them agree that the delivery solution that makes the most sense is either a last-mile strategy or a micro distribution approach. Acquiring space that’s close enough to rooftops to do that means reimagining spaces and converting them to industrial use. Closed or underperforming malls, retail centers, fitness clubs, and even old car lots and movie theaters are all candidates for redevelopment and re-use. It’s a fitting irony that the same pandemic conditions that presented retailers with new questions and new challenges has also simultaneously delivered new opportunities.

But if you’re going to need space close to rooftops, you’re going to be in big, densified markets, and that’s an expensive proposition, isn’t it?

Escalating prices for land, labor, and materials have dramatically changed the financial decision-making process for retailers and development professionals alike. In Las Vegas, for example, the cost of land changed dramatically in the last two or three years. It nearly tripled from around $4.50-per-square-foot to around $12.75-per-square-foot. Continued speculation by industrial developers is pushing prices up across the board.

So how do store-builders become warehouse-builders?

Those looking for easy answers will find themselves disappointed. Creativity and flexibility must be employed to find workable solutions. They need to proceed with caution as they become more active in a specialized part of the market where they aren’t necessarily the fastest, the nimblest, or the best. They need to work closely with logistics, development, and design professionals who understand the industrial market.