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Ugly duckling assets have investors smitten

A global industrial revolution is underway as a shift in consumption habits drives unprecedented demand for distribution space.

Speakers at last week’s NYU Schack Third National Symposium of Women in Real Estate said the sector is in no danger of seeing its Cinderella story end any time soon, with demand expected to rise by an additional 850 million square feet in the US between now and 2023.


Neha Santiago, vice president at Goldman Sachs, told the conference that the fact that half her Instagram feed was full of “online intimates” was indicative of the type of transformation that has taken place within the retail sector and predicted, “They are only beginning to scratch the surface.”

Santiago explained, “The percentage penetration by ecommerce on bricks and mortar retail has risen from four to eight percent from 2008 to 2016. From 2016 to today, it has risen from eight to 17 percent and growing. The sheer pace that ecommerce is replacing traditional retail and spending and buying habits is leaps and bounds greater than people expected it to be.”

Pointing to the mall-operator Simon’s $280 million deal earlier this month with Rue Gilt Groupe to launch an online outlet marketplace, Santiago added, “Five years ago, there were certain panels within retail that were not as easily penetrated by ecommerce. Things like fast fashion, certain goods and services we still felt we needed to touch and feel and go to the store to experience.

“We would have said brands such as Gilt and Ru La La would continue to have very strong staying power within the outlet space because how could ecommerce possible penetrate a sector that has so much volume and such a large variety of goods? Well, people are figuring it out and getting ahead of it. I would have said five years ago that Victoria’s Secret would be around forever, people are always going to want to go to the store and try it on and make sure it fits appropriately. Today, half my Instagram feed is online intimates.

“They are just beginning to scratch the surface in terms of how much opportunity there really is in ecommerce space and all of that needs to be accommodated through industrial space.”


Katie Keenan, managing director of real estate debt strategies with Blackstone, said her company remained bullish on the industrial sector, having just announced on a $6 billion acquisition of the Colony Capital industrial portfolio made up of largely last-mile light industrial buildings in 26 U.S. markets.

“We have seen this globally,” said Keenan. “Industrial is the flip side of retail and people shifting their consumption habits and the areas where it is most valuable are infill locations and areas where it is really uneconomic to build. Barring some of the multi-story industrial we’ve seen in New York City and other dense areas, its uneconomical to build new industrial, so you’ve got really strong demand and very mitigated supply and that creates extremely positive fundamentals. We expect demand to continue and its area we are very focused on.”

But despite a reshaping of the sector that has changed the face of industrial real estate investment, Deloitte financial services manager Saurabh Mahajan believes investors should be wary.

In a research paper earlier this year, Mahajan predicted slower growth as the market becomes oversupplied and tech startups disrupt the sector with new ideas. “Apart from new developments coming into the market, many on-demand warehousing startups, such as Flexe and Flowspace, are aggregating under utilized industrial real estate spaces to fulfill seasonal warehousing needs. In addition, some owners are repurposing vacant or near-vacant nonindustrial real estate spaces to provide more options for renters seeking warehouses in closer proximity to consumers. While retailers are converting stores into smaller showrooms and using the additional space as small warehouses for faster fulfillment, owners of some older office buildings are also converting vacant spaces into industrial real estate. The adaptive reuse extends to under utilized parking lots and garages and even erstwhile churches. The increased availability will likely put downward pressure on industrial real estate rents and prices.”

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