Well, actually, the few times that i had to do this (with defective iPhone 5), i got a brand new unit because refurb was not avail early in the cycle.
As for exchanging to get higher storage or features, of course...i thought that was obvious.
well actually, that's still a repair under warranty. if they'd had refurbs, they wouldn't have considered giving you a new one.
as it is, the repair for that specific defect would be exactly the same as for processing a refurb to go into white box stock - replacing the outside case... and the time taken to do that? who knows, it's not an in-store job. easier to give you a replacement to make you happy than say come back next week.