Responding to Change

2nd Quarter 2011 Hotline

Market Watch
Southern Industrial Development

by Joe A. Hollingsworth, Jr.

One of the most marked changes occurring over the last 15 years has been the shift from “bricks and mortar” retailers to online retailers. It was only eight years ago that pundits began tracking Cyber Monday in addition to Black Friday, but, in just that short time, Cyber Monday has seen gains in retail sales of over 647% while Black Friday sales have only grown 34% cumulatively.

While the trend has many implications for the overall economy, the downward pressure on retail margins has been undeniable. Customers can go into stores to find exactly what they want on display then find identical products at hundreds of other merchants with simple online searches while standing in the displaying store itself. This presents the displaying retail store the opportunity to match the lowest internet price, but most cannot afford to do so which results in slower sales at higher margins or faster sales at substantially lower profit margins.

Internet companies do not have the overhead of expensive retail locations allowing them to push down prices and still obtain similar profit margins. As supply chains become more agile and responsive, retailers are shrinking their retail footprints to more “showrooms” and “demonstration areas” where little warehouse stock is kept. If the customer likes the product, the retailer can ship from the fulfillment center or the customer purchases directly from the store prompting an immediate shipment from the fulfillment center to the retail center.

We believe this trend will remain intact for a great number of years, thus undermining the value of big box shopping centers with attached warehouse space and creating a growing need for additional space for fulfillment centers.

With this confirmed trend already in place, it has had substantial effects on several real estate sectors. Downward value pressure exists on shopping centers that have retailers with large warehouse allotments. As those leases expire, they are simply not being renewed or significantly being reduced in price or reduced size, thus presenting the owner/lender few options for releasing the surplus space at a reasonable market price. However, it is creating a distinct need for fulfillment centers with locations on key interstates near key shippers. While we currently see fairly large amounts of vacancy in industrial warehouse nationally now, we believe the substantial reductions in vacancy rates are being driven by this phenomenon of building rapid response fulfillment centers which holds up an industrial property’s value in these key locations. As the economy further returns to normal, we predict that there will actually be a shortage of this type of space in key markets developing over the next two quarters.

“Joe Hollingsworth participated as one of our first equity investors. In addition, Joe Hollingsworth has served as a board member and leading advisor for strategic planning and direction.” — Scott Kelley, President and CEO, Service Center Metals