New Leases On Life: Malls Converting To Fulfillment Centers, Other Non-Retail Uses

Plagued with a downturn in sales and foot traffic in recent years, malls found novel ways to stay in business.

Given ecommerce and COVID-19 restrictions, some have converted their retail space into mini-fulfillment centers for ecommerce orders.

Foot traffic for malls was down 27 percent last year compared to 2019. The effects are causing mall owners, such as Washington Prime Group, a major mall owner of 100+ locations across the United States, to file recently for Chapter 11 bankruptcy.

Conversely, ecommerce sales in the U.S. are expected to grow another 18 percent this year, according to market-research firm eMarketer. Mall operators look to grab a share of this pie by converting retail space into in-house fulfillment centers. (They are also considering leasing to non-retail spaces, such as entertainment centers, medical centers and office spaces.)

Mall operators have unique advantages that make them ideal out-of-the-box micro-fulfillment centers: central locations, ready-made warehouse spaces and on-site retailers.

A vacant escalator in the Shops at Sunset Place mall on April 07, 2021 in Miami, Florida. Moody’s Analytic’s commercial real estate division reported that the vacancy rate for regional malls in the United States hit a record 11.4 percent in the first quarter of 2021 from 10.5 percent in the fourth quarter of 2020. (Joe Raedle/Getty Images)

A CBRE analysis found this shift has accelerated since 2017, with the addition of 60 new retail-to-industrial conversion projects. These projects will convert 14 million square feet of retail space into 15.2 million square feet of industrial space.

This conversion to industrial is a substantial increase from the 94 projects in the previous decade. It is still a small potation of the industrial real estate market, but is a significant indicator of an ongoing transformation.

“The pandemic has accelerated the decisions and the rethinking of repurposing enclosed walls,” said Chris Maling, a principal at Avison Young Inc., for Retail Capital Markets. “This positive outcome of a very devastating pandemic has actually helped educate, introduce and awaken this new trend, which is what consumers want and is how we can make these assets valuable.”

Ecommerce and logistics giants, such as AmazonDHL and FedEx, have begun to consider investments in mall spaces as strategic distribution hubs for easy freeway and residential access. The new sites will be used as “last-mile” delivery hubs.

In fact, Amazon has converted 25 mall spaces into distribution centers since 2016, according to Coresight Research.

“Last-mile delivery continues to be a big portion of overall ecommerce delivery. Using malls for last-mile sortation allows for further consolidations of parcels resulting in lower costs,” says Vikas Argod, director of supply chain operations at consultant Chainalytics.

Foot traffic has dropped dramatically in many malls nationwide. (Statista)

Simon Property Group, which operates over 200 malls, is now in talks with Amazon to covert some of its space into mini-fulfillment centers for the ecommerce giant. But it’s not solely online retailers looking to make this shift. Traditional retailers, such as Target and Costco, are taking these once-large mall retail spaces and using them for online order fulfillment.

They are especially targeting malls in markets they have not been able to penetrate or have been supply constrained, due to building restrictions or lack of land availability.

Maling expects that over the next three-to-five years, the United States will see a massive shift into these multiple-use scenarios in malls that were strictly retail. “It is going to be exciting because it is going to benefit communities and customers.”

Despite this shift, many retailers are expected to keep some mall space. This can be attributed to an increase in omnichannel retailing. In an omnichannel retail world, consumers use multiple channels to come to a single transaction.

“We are seeing malls as a node for ‘BOPIS — Buy Online Pick Up in Store,’ ‘BORIS — Buy Online Return in Store,’ and ‘SFS — Ship from Store’ a lot more compared to malls as a node for distribution only,” says Argod.

Necati Ertekin, supply chain and operations professor at the University of Minnesota, explains why retailers with the omnichannel model would keep their mall spaces.

“The benefit is more on the cross-selling. Even though consumers don’t have the intention of buying something else, going to a store can motivate someone to do just that. Such impulsive purchases can generate cross-selling opportunities for pinnacle stores,” Ertekin said.

Kohl’s now serves as a return center for Amazon. (Justin Sullivan/Getty Images)

This model has been proven to work efficiently. In fact, the integration is going beyond a single company, resulting in cross-company collaboration to boast the cross-selling effect. One big example is the Amazon and Kohl’s partnership. Kohl’s now serves as a return center for Amazon.

The benefit: Amazon makes the return process more convent for Amazon customers. And for Kohl’s, the Amazon returns to their stores drive foot traffic and cross-selling opportunities.

For the stores that don’t adopt this model, there has been an alternative shift toward the “showroom” model. Consumers go to the store to view the product and make an online purchase in the store, where it is then shipped to their homes.

For example, Warby Parker, a popular eyeglass retailer, doesn’t keep any inventory in the store. Instead, it places online orders for consumers in the store.

Malls are seeing “two different extremes. A showroom model with no inventory, just to display inventory to capture orders. Or the other extreme, where retailers keep their space because they want to use this store space as a fulfillment center to fulfill part of online fulfillment,” said Ertekin. I don’t think, for the moment, there is a dominating model. Between the two, it will be very likely that we see both applications.”

Edited by Bryan Wilkes and Fern Siegel



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