The Future of Brick and Mortar Retail in the Age of Internet Commerce

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It seems as if every few days, we hear about yet another retailer who intends to close scores of stores. These types of announcements have prompted a lot of discussions regarding the long-term health of the retail industry. Last month, the leading convention for the retail industry, known as RECon, was held in Las Vegas. Any time you get 37,000 industry professionals together, stories are bound to emerge and this year was no different. Below are some key takeaways from this year’s show.

The internet, and specifically Amazon, isn’t the only thing responsible for the current downward spiral in the retail market. Although no one can deny the dramatic growth by Amazon, a peek behind the actual statistics provided by the U.S. Department of Commerce provides some interesting framing. In the fourth quarter 2016, retail sales were estimated to be $1.24 trillion. Of the total retail sales, approximately $102 billion were attributed to online sales, and of the total online sales, just under $44 billion was attributed to Amazon. So that means that online sales accounted for 8.2 percent overall and Amazon specifically accounted for 3.5 percent. While no one will deny that internet sales have had an impact on the retail industry, these numbers illustrate that there are other factors at work. Experts point to the continued maturity of the retail industry, the increased competition and fragmenting of the industry and evolving consumer tastes and preferences as all contributing.

Regional malls are undergoing a transformative change. Although the real estate industry has and will continue to be cyclical in nature, what has been happening (and will continue to happen) with regional malls is much different. Experts think that the retail square footage associated with malls could shrink by as much as 30 percent over the next five years and the majority of the malls that are currently struggling will either need to be re-positioned or redeveloped into something else. A quick look around the Cleveland market confirms this. The former Parmatown and Westgate malls have already been re-positioned. Randall Park Mall has been redeveloped with the long-vacant Euclid Square Mall rumored to be close behind. Midway Mall and Richmond Mall are both struggling and have cloudy futures. When Southpark Mall opened in 1996, few probably thought that it would be the last regional mall developed in the Cleveland market. But 20 years later, it certainly looks that way.

The balance of power between landlord and tenant has shift ed toward the tenant. This has been a benefit to tenants with the strongest credit rating, as this group can have their choice of which projects they are located. But this has also benefitted other tenants, as most retailers would rather have a lower-grade retailer that is paying their rent as compared to an empty storefront. Because of this, retail rents are expected to remain flat, at best, and in some markets and/or for some retail properties, rents may actually decrease over the next year or two.

Interest in retail properties as a real estate investment has slowed. Given the rash of announcements related to store closings by some retailers and concern related to the growing impact of internet sales, most investors are taking a wait and see approach to this sector. Industry experts believe that this attitude will persist throughout the balance of 2017, with particular focus on the upcoming holiday sales season. One of the few exceptions is destination-type retail centers, such as those anchored by strong grocer stores or drug stores. Consumers tend to shop at the same grocery and drug stores on a regular basis and these sectors have felt little impact associated with rising internet sales. As a result, competition amongst real estate investors for these types of centers is expected to remain keen, with continued strong pricing.

Podium

Many retailers are downsizing but some are growing. The list of retailers that are closing stores is long, including RadioShack (550 store closings expected), Payless (400 store closings), Rue 21 (400 store closings), The Limited (250 store closings), JC Penney (140 store closings) and Kmart (100 store closings), among many others. But not all of the news is bad in this industry, as several retailers are expected to open additional stores this year. Leading the list of major retailers are Dollar General (810 new stores expected), TJX Cos (150 new stores), Ross Stores (85 new stores) and Walmart (52 new stores). A common thread amongst these is that all are value-oriented or discount retailers, which illustrates a continued expansion in this sector of the retail landscape.

Overall, the majority of RECon 2017 attendees left with a positive outlook. Everyone recognized that this industry has been impacted by many changes. Some of these changes started many years ago while others are much more recent. But most remained in a positive mood, seeing this as a time of opportunity to address these challenges and become stronger in the process. Jill Dzina

OAS

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