October 1, 2019
By Dennis Kaiser
The retail sector continues to face a host of challenges, some from currents outside the industry and others from within. Yet, commercial real estate economists say despite the obstacles, retail may be ripe with opportunity.
That point of view is outlined in CCIM’s 3Q 2019 Commercial Real Estate Insights Report. Author K.C. Conway says, “The truth is, the real villain behind what many industry analysts have coined as the “Retail Apocalypse” is overleverage. Furthermore, online retail sales are still a relatively small portion of total retail sales that have yet to take a real bite out of retail store activity.”
Among the silver linings of retail Conway writes are the fact that, “Many vacated malls, shopping centers, and big-box stores have desirable location attributes – frontage along primary commercial arterials and public transit routes, proximity to employment centers, and site configuration or building design that’s well-suited for adaptive reuse. Conversion of these buildings is ideal in meeting the ongoing demand for affordable housing, industrial warehouse utilization, off-hospital campus medical use, and even coworking office space.”
He notes, “Both retailers and communities have a vested interest in putting these real estate assets back to productive use to recapture lost property value and return vacant buildings to new uses accretive to property and local tax revenues.”
The report explains that retail has always been experiential, dating as far back as centuries-old seaport trading centers, to the more modern development of shopping malls. Conway predicts, “Retail success in its next iteration will be defined by alignment with services – services like hospitality, transportation centers, health care, and education.”
The CCIM report peeled back misconceptions behind retail bankruptcies and store closings, and proffers where the next generation of retail is headed. It ponders if mall retail stores could re-emerge in hotel lobbies, airports/transportation centers, and medical centers? Could the halo effect accelerate with retail aligned with these service offerings?
The four retail myths Conway outlines in the report include:
Myth #1: Retail Bankruptcies and Store Closings Are Due to Less Consumer Spending.
The fact is, total retail sales have increased at an average annual rate in excess of 4.35% since 1993, according to Trading Economics. Additionally, most retailer quarterly earnings statements report increased physical same-store and online sales. While online sales have yet to reach 10% of total retail sales, the growth is on track to make a material impact by 2025, with 20 to 25% of total retail sales projected. The real culprit behind the bankruptcies and closures is overleverage, writes Conway.
Myth #2: After Years of Bankruptcies and Thousands of Store Closings, Both Will Abate in the Coming Year. The simple fact is that the U.S. is “over-retailed.” Research shows the U.S. has more than 115,000 shopping centers totaling more than 7.5 billion square feet. That translates to 24 square feet of retail space per person in the U.S. – 50% more than second-ranked Canada, according to PwC.
Myth #3: Online Retail Is Expanding Because It Is More Cost Effective. Apparel retailers’ net margin from merchandise sold at brick-and-mortar stores was 32%, compared to 30% for online apparel sales, notes Conway. The cost to build omnichannel systems, operate last-mile delivery reliant upon the current inefficient infrastructure, and process the volume of returned online merchandise (now an estimated 30% of all merchandise sold online) are much more capital intensive than leasing, stocking, and staffing brick-and-mortar retail stores.
Myth #4: Malls Are Obsolete, and No More Will Be Built. The mall is not dead. In 4Q 2019, one of the 10 largest malls in America will open in New Jersey. The mall is not obsolete – it is just going over the top on entertainment offerings.
Conway offers five predictions for the future of retail. They include:
– As Online Continues to Grow, Retail Reimagines Itself: While the technology enabling more online purchases is reducing the need for physical store space, it is not eliminating the need for retail real estate. Additionally, physical stores and e-commerce will become an increasingly connected omnichannel experience, and the role of the store itself will become more experiential.
– More Co-Retailing Pops Up in Hospitality: Technology is rearranging the chairs where retail activity will be seated, rather than eliminating the need to seat retail in real estate space. Service offerings will become as important as experience.
– E-Commerce Goes the Extra Last-Mile: The demands on supply-chain infrastructure from a rapidly growing e-commerce economy will only increase over the next decade. The current logistics infrastructure in the U.S. cannot support a modern e-commerce supply chain that is growing 25 to 30% a year. The battle to conquer last-mile must include a massive CapEx investment to overhaul every aspect of infrastructure. No part of this solution comes cheaply or without a lot of public and private CapEx spend, writes Conway.
– What’s Old Is New Again: Adaptive reuse of retail centers and malls will be the most impactful, powerful trend for retail between now and 2025.
– Nothing Is Certain Except Death and Property Taxes: Changes in property tax legislation, combined with big court wins for retail, will have governments looking elsewhere in the retail food chain for state funding. Because the largest portion of revenue for local government and school districts is property taxes – and commercial properties like shopping centers, malls, and big-box stores represent annual property taxes that can equate to as much as an entire residential subdivision – the dollars at stake are quite substantial, notes Conway. The value of department and big-box stores are nowhere near what they once were, but local government jurisdictions can’t afford to take the revenue losses in property tax appeals.
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