Digital sales have soared in the wake of the coronavirus pandemic, so much so that warehouse space now comes at a premium. In fact, some retailers are so desperate for warehouse space they're willing to construct it themselves.
Such is the plan for Gap (NYSE: GPS), which plans to invest $140 million to construct a massive distribution center in Longview, Texas. The 850,000-square-foot facility, once completed, will have the capacity to process 1 million packages per day. Initially, Gap plans to use that facility to ship out Old Navy products and will then expand to other brands.
Construction on the mega warehouse is set to begin in April, and Gap expects it to be fully functional by August of 2022. The facility is expected to create more than 500 full-time jobs by the end of 2023 and over 1,000 new jobs spanning the next five years. It's also expected to result in more than 1,000 part-time and seasonal jobs by 2026.
A clear shift to e-commerce
During the pandemic, many consumers have favored online shopping because it's not only convenient, but it also takes the risks of stepping foot in a store out of the equation. But many retailers think this trend won't be short lived, and so they're investing more money into warehousing and logistics, and they are shifting money away from opening new stores and renovating existing ones.
Gap is clearly following a similar pattern. While Gap's sales declined during the pandemic as customers stayed away from malls, its online business has grown a lot over the past 12 months. This new warehouse is part of Gap's plan to double its online business over the next two years.
Gap expects to derive half of its sales from digital orders by fiscal 2023 as it shuts down underperforming stores and invests more money in its Old Navy and Athleta apparel brands. The company is currently in the process of shuttering about 30% of its Gap and Banana Republic locations throughout North America.
Bad news for malls
The fact that Gap is pumping so much money into a new warehouse and is making big plans for an even greater e-commerce boom isn't the best of news for shopping malls. Gap has long been a mall mainstay, but if it continues to focus on digital sales, additional store closures could be in the works in the coming years. And seeing as how shopping malls have already lost a host of tenants in the course of the pandemic, that's extremely troubling.
In addition to focusing on online sales, Gap is also one of many retailers looking to go off-mall in the coming years. And if its freestanding stores outperform mall locations, that, too, will make the case for additional closures.
The bottom line
Gap probably won't be the only retailer to switch gears and invest more in digital sales in the coming years, so mall real estate investment trust (REIT) investors should prepare for that disruption. On the flipside, there may be opportunities for investors to get into the warehousing space. E-commerce is only likely to grow in the coming years, which will result in an uptick in distribution center demand. It could pay for investors to move away from malls and look at industrial REITs instead.