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The Warehouse Boom

January 18, 2012 Leave a comment Go to comments

A few hundred square feet isn’t what it used to be. These days, it’s worth more.

As CoStar Group’s Mark Heschmeyer reported last Wednesday, online retail’s ever-growing presence in the national economy isn’t simply replacing the demand for retail space with an equal demand for warehouse or distribution center space. That would seem logical, since e-commerce isn’t diminishing the demand for any particular commodities, but simply moving them to a new place and selling them in a more streamlined fashion.

Warehouse 300x200 The Warehouse Boom

However, warehouse space is quite different from a storefront property, and not simply because of the cost disparity (per square foot, leasable warehouse space may cost as little as half that of other properties, according to the research department of Grubb & Ellis).

A key difference between storefront and warehouse properties, one that is having a great impact on the commercial real estate industry–and not for the better–is the fact that online retailers have the freedom to use their space much more efficiently.

While traditional retailers must allot a great deal of space to accessible shelving, fitting rooms, special displays and check-out areas, the e-commerce sector doesn’t have to factor customer appeal into the layout of their properties. With higher shelves and narrower aisles, they can hold the same amount of a given commodity as their traditional competitors–but in a much smaller space. (When you factor in the digitalization of books, music, and movies, the warehouse demand decreases even more.)

If you compare the sales of online behemoth Amazon (NASDAQ: AMZN) and one of its largest traditional competitors, Best Buy (NYSE: BBY), you’ll see the numbers don’t immediately appear to be in Amazon’s favor, despite its nearly exponential growth. (Click for a larger image.)

amzn vs bby 300x76 The Warehouse Boom

But keep in mind the cost of overhead. When you compare Amazon’s consolidated warehouses to Best Buy’s sprawling big-box stores, you can tell the revenue-per-square-foot numbers are surely in Amazon’s favor.

Before we further lament the decline of traditional retail–and the decrease in income for shopping center REITs like Simon Properties (NYSE:SPG) that comes with a shift to cheap warehouse space–keep in mind that some retail will remain loyal to storefronts. Boutique and specialty shops often attract a more wealthy clientele interested in a real “shopping experience” (which e-commerce can’t provide). Such customers will still prefer to buy their $200 shoes in a traditional store.

That said, make sure your next shopping center or mall investment includes a shoe store.

Reprint from Llenrock.com    Eric Hawthorn

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