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The Amazon Effect: The Evolution and Disruption of the Commercial Market

The Commercial Broker Roundtable discusses issues affecting the commercial market and their ramifications for residential real estate.

Moderator: Deena Zimmerman, Vice President, SVN Chicago Commercial

Participants:
Chris Bornhoft, CCIM, Broker, Commercial Sales and Leasing, Windemere Commercial
Tommy Choi, Co-Founder, Weinberg Choi Residential
Scott Maesel, Executive Managing Director, SVN Chicago Commercial
Emily Line, Vice President, Commercial Services, Realtors Property Resource® (RPR®)

Deena Zimmerman: The Amazon Effect is a disruptor in commercial real estate in all the right ways. It has changed the way we look at brick and mortar real estate, created a domino effect as it relates to industrial and land acquisitions, and a higher demand for office space…which then leads to an increase in home sales. How has it managed to impact so much in both the commercial and retail real estate sphere? Scott, what’s your take?

Scott Maesel: Traditional retail space was in a slow decline before Amazon moved into that territory. Amazon has added millions of square feet across the country in new ground-up distribution centers, capturing large amounts of industrial supply space—both existing and new construction. It has helped drive demand across the industry. The industry as a whole has seen better returns, and higher price per square foot, in space being leased than it has in decades.

Chris Bornhoft: I think it is difficult to accurately gauge the direct effect that Amazon specifically has had on retail space. As for trends in retail, those are much more easily identified. Service-based companies, like tutoring, restaurants, fitness, dance studios, and schools, are the type of tenants we are seeing open up. These are not things that you can get on Amazon.

Emily Line: Since the Amazon Effect, there’s been fear that retail focus is in trouble. I don’t believe that at all. It’s just a different experience with blurred lines between sectors. Retail and industrial sectors have much more opportunity together to fulfill the changing trends with shoppers. The more productive approach for commercial real estate practitioners surrounds a shift in mindset to support clients as they pivot on their business plans in order to remain viable. Jeff Bezos opened our eyes to a need, and that need was to rethink the customer focus with greater efficiencies for shopping. Brick and mortar is not going away. Space and business strategy are being reimagined to cater to the growing population that wants choice in how they shop or an opportunity to quickly get items in rural markets. An increase of distribution centers allows for more goods to reach those in smaller markets in a timely fashion, as well as creates economic growth in the form of jobs to those areas.

DZ: What are your thoughts on Amazon getting into the grocery store space?

SM: Amazon’s entry into the grocery space has produced two significant results. The first is in the noticeable price drop in Whole Foods goods. The other consequence of their entrance into the grocery space is a negative impact on small to mid-size independent grocers. Several independent produce-related grocers are already looking for exit strategies.

CB:
It should make all grocers better at the new “Google it first” online retail model. Consumers want convenience and Amazon is going to start delivering. If these other big-box stores don’t respond quickly, they are going to start looking like K-Mart parking lots. We still need places to go and pick up items, but imagine if I could order my toothpaste, milk, and a bottle of wine from Walgreens and they could have it delivered to my house in 2-4 hours, for free. Paying for a subscription service like “Walgreens Prime” could be the new competitor to Amazon and they already have a store on almost every corner. These big retailers need to step up their game.

DZ: What are the ramifications for residential real estate if Amazon HQ2 comes to Chicago?

Tommy Choi: The ramifications for residential real estate of Amazon building an HQ here would be increased demand of housing. I would imagine it would mirror what Google’s Chicago HQ equated to in the West Loop. We saw a competitive market for buyers with a shortage of inventory. The curve ball in this scenario would be what accessibility to public transportation will look like. If the HQ’s proximity to trains and buses are limited, most likely demand will heighten the need for employees to live within walking distance. Just like what Google did for the West Loop and Fulton Market, an Amazon would draw A+ retailers and restaurateurs. This would bring added amenities to the neighborhood, and more homebuyers looking for that prime convenience.

DZ: And that’s a scenario that’s likely to play out for commercial and residential real estate no matter where Amazon HQ2 makes its new home. It will be both a great opportunity and challenge for real estate professionals across the board.

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