It’s tempting, even popular these days to claim that e-commerce is wiping out traditional retailing. It’s also wrong.
The demonstrable reality is that online and in-store retail can coexist quite nicely, even beneficially with e-commerce. Consider the International Council of Shopping Centers’ recent calculation that roughly half of U.S. online sales in 2016 were generated by retailers born of bricks and mortar.
To be sure, e-commerce is growing rapidly, but much of that growth can be traced to retailers firmly established in both worlds. That has substantial implications going forward for retail property.
The days of U.S. equity markets judging retailers by how many stores they open are gone. Retailers’ performance is now judged by many more variables, including their balance of online and in-store sales, the flexibility of their supply chains and new store formats. They now have far more data and tools available to them than ever before to analyze potential store sites.
Still, we’re now seeing well-known retailers fail due to sins of the past, be it debt loads incurred in private-equity buyouts or overly aggressive expansion or the rigidity of their concepts. The temptation, then, is to assume that the struggles of Toys R Us, Sports Authority, bankrupt retailers and various department stores are representative of the broader industry. That’s not accurate for several reasons:
- While several household-name retailers have struggled of late, the greater portion of the industry – small chains, independent retailers, discounters, restaurants, etc. – have continued to expand. Market research firm IHL Group found that retailers opened 4,000 more stores than they closed in the U.S. last year.
- CBRE has found that U.S. retail property has fared well in recent years, with net absorption – a proxy for demand – remaining positive for the past 27 consecutive quarters and average rents increasing for the past 16 quarters. Availability rates remain on par with 2007-08, mostly because new construction remains held in check at a third or a fourth of prerecession levels.
- U.S. retail sales posted their largest gain in the fourth quarter since 2012, buoyed by strong consumer sentiment and better performance from previous laggards, including department stores.
Despite this newfound momentum, many challenges remain. We at CBRE see cause for optimism that U.S. retailing can meet these challenges, adapt and prosper. Here are a few ways that can happen.
A primary task for U.S. retailers is to improve their consumer experience, which is both an art and a science. Retailers now have more customer data at their disposal, including mass-mobile data, to better tailor their in-store and online operations to their customers’ tastes.
That can include décor, product demonstrations, education, a constantly refreshed merchandise mix and showroom-style stores. It nearly always entails efficient, personalized service. E-commerce is hyper-convenient for consumers, which means that, in turn, in-store shopping must be both convenient and enjoyable in terms of the experience provided.
Consider several retailers that are incorporating technology to make their in-store experience more efficient. Fashion retailer Zara has introduced an automated system that customers can use to quickly pick up online orders at its stores. Luxury retailer Nordstrom Inc. has equipped its salespeople with tablets to allow customers a more efficient checkout process anywhere in the store.
Shopping center owners also take responsibility for improving customer experience. Depending on the center, that might entail creating better public gathering spaces and curating a lineup of public events. Most often, it calls for creating an intriguing, often-changing tenant roster that eschews the monotony that has plagued some parts of the U.S. mall industry.
That’s easier said than done, considering that commercial real estate lenders tend to favor the credit stability offered by long-term leases with national retailers. Shoppers, however, want a taste of discovery and uniqueness if they’re venturing out of their homes and offices.
One solution is to create a periodic refresh of a center’s tenancy by accepting more short-term leases. Traditionally, retail leases in the U.S. span five to 10 years, which provides the landlord, lender and tenant some security. Now, some landlords are allowing shorter leases of a few months to three years in certain sections of their properties. This gives them flexibility to experiment with as-yet-unproven retail concepts, some of which might blossom into longer-term tenants and others of which can be quickly replaced if they fail.
The flip side of this strategy is that property lenders find little appeal in the relative insecurity of short-term leases. Thus, there must be compromise. Landlords and lenders will need to relax their standards. Meanwhile, start-up retailers provided short-term leases might need to give their landlords something in return, such as percentage rent or an equity stake that allows landlords a greater share of the upside.
Perhaps the format most ripe for this kind of tenancy overhaul is the U.S. mall. On average, roughly 78 percent of square footage in U.S. malls is occupied by what now are relatively slow-growth categories: department stores, apparel, accessories and footwear. It’s no coincidence that these categories also have high e-commerce penetration.
The mall industry’s challenge going forward is to add more high-growth tenants such as restaurants, home furnishings and décor, and health and personal care stores. Shorter-term leases are one means of achieving that tenant revamp, but additional strategies will be needed. For example, some retail-center owners are putting more emphasis on adding convenience services such as dental practices, medical offices, shipping outlets and fitness centers.
In summary, the outlook for the U.S. retail-property sector is healthy despite persistent negative headlines. However, retailers and landlords alike must adapt to the evolving marketplace through greater flexibility, better use of data and more focus on consumer experience.
