Any one that has followed the industrial market for the last few years knows that ecommerce has created the heyday of industrial real estate. The industry has created tremendous demand for industrial space and has driven vacancy rates to historic lows—sub 1% in certain L.A. submarkets—creating a frenzy for more space. Now, ecommerce might be helping to increase the supply. Brick-and-mortar retail closures are beginning to turn into industrial downsizing, since fewer fulfillment centers are needed to supply brick-and-mortar locations.
“I represent some large corporations, and they have told me that because online sales are killing their business, they are cutting back on brick-and-mortar retail locations as well as the distribution and fulfillment facilities that support those locations,” Chris Jackson, an executive managing director at NAI Capital, tells GlobeSt.com. “I think you are seeing that across the board.”
Some retailers—like Toys R Us—are closing all of their stores, spilling the corresponding industrial supply onto the market, but other retailers are simply downsizing their industrial needs as their brick-and-mortar retail portfolio shrinks in specific areas. “Some companies are trying to figure out how to downsize,” says Jackson. “They are finding that they need less industrial space. They are keeping a few facilities, and they are shutting the rest down.”
While more supply is good news for the L.A. market, the majority of the industrial buildings coming to market as a result of retail closures are large—over 100,000 square feet. The most fervent demand, however, is for more mid-size industrial boxes, around 50,000 square feet. “As retail users start to close, I think that could impact the market,” says Jackson. “Larger buildings have been sitting on the market for longer. In the bog box buildings over 100,000 square feet, even though there aren’t a lot of them, those big box buildings are beginning to stay on the market a little longer.”
As a result, he thinks there are going to be more redevelopment industrial projects this year, taking larger box buildings and making them multi-tenant facilities. Of course, that will also help to increase the supply. “I think the trend that you are going to start seeing is private individuals that own large buildings are going to sell, and they new ownership will divide the building into smaller spaces so that it can be leased out,” says Jackson. “So, the market will open up a little bit. It is hard to find one tenant for those large big box buildings.”