With a vacancy rate sitting around 30 per cent and lots of empty space in Calgary downtown office buildings these days, some of those properties could be eyed as possible future retail fulfillment centres to meet the growing ecommerce demand and the lack of industrial real estate in the city.
In fact, during a panel discussion on the industrial real estate market at the recent Calgary Real Estate Forum, the idea of using under-utilized office space in the central business district as retail distribution centres was brought up as a potential trend in the future.
When asked if there could be a zoning change in the city to allow for potential ecommerce distribution centres in the downtown, Matthew Sheldrake, manager, growth strategy, City of Calgary, replied: “I’m going to say yes. As long as we keep our definitions flexible on what is downtown and what is the use . . . One of the more interesting conversations in the industry is this last-mile stuff and it’s happening in other cities in North America. I don’t see why it can’t happen here. I think we can be flexible . . . We’ve been flexible before. We’re ready to bring some of this stuff on. I think the market’s there for it. We’ll just have to see what the transportation cost profile is for someone who really wants to do it relative to rents and things like that.”
Gary Newbury, a national supply chain expert, said that on the face of it, converting spare office buildings, especially in high density urban zones, such as downtown areas, to fulfillment centres, given the pre-pandemic shortage of fulfillment space, many businesses might think to rush in and support such an initiative – especially with the rapid rise in the use of online services.
“The key to making this a success, given the uncertainty that we are currently working through, is to go back to the business’s purpose, their target segment demographics and, specifically for a projection of the uptake of online services – such as click and collect and home delivery,” he said.
Factors that should be considered are truck access for inbound deliveries, any zoning requirements and likely restrictions on truck movements. Other factors include point loading. MFCs (micro-fulfillment centres) can be very heavy when full on inventory.
“One of the big challenges for retailers, and their carriers, during the pandemic is addressing high density areas, the congestion, obstacles and lack of provision for order delivery. Having stock very close to a relatively large population means a retailer can respond quickly to customer orders, maybe with modes, such as bicycles, which are much greener than trucks, and often much quicker,” said Newbury.
“The big question that is prompted by this scenario is whether the retailer, or their carrier, operates the facility exclusively, or a third party provides a more inclusive service across various retailers. The latter would often make more sense. Coordination across retailers for order processing focused on delivery addresses, rather than the originating retailer would help to reduce costs and the increasing environmental impacts on eComm.”
Bruce Winder, author of RETAIL Before, During & After COVID-19 and President of Bruce Winder Retail, said using empty downtown office space for local fulfillment could make sense in some cases, but care needs to be taken in terms of where and how they operate.
“As urban warehouse space is hard to come by and customers demand same day or next day delivery on growing ecommerce orders, vacant office space could help fill the gap. This approach will also lower the use of delivery trucks from frequenting downtown roads which has become a big problem in places like New York City, where congestion has negatively impacted traffic flows,” he said.
“There is also a sustainability play as customers can pick up packages themselves and avoid last-mile vehicle generated pollution. It will be important to ensure that landlords understand the steady state of office vacancy as white-collar workers return to the office in 2022 before making major investments.”
“If downtown rents rise again post-pandemic, this may create problems justifying the space financially as warehouses have historically been built in suburban or rural areas where costs are lower. It could be worth piloting in a few markets to see if it works.”
John Moss, Senior Vice President with commercial real estate firm CBRE, said conversion from office to industrial would be extremely tough.
“Transportation including loading and truck turning radius would limit opportunity to certain buildings / areas,” he said. “Tenants would be challenged with the sheer costs of downtown compared to conventional industrial. Ceiling heights and elevators would also post operations issues.”
