brick-and-mortar retail

Brick-and-mortar Retail: The Road Ahead

Mark Twain is often quoted as saying, “The reports of my death are greatly exaggerated.” If the retail sector had a collective voice, it might echo what the great writer once said.

It may surprise those who’ve seen recent headlines to hear that while several retail categories have been in contraction mode as a result of explosions in e-commerce, a number of key retail categories have been in expansion or even aggressive expansion mode. Discounters, off-price apparel and dollar store concepts have largely driven growth for hard goods retail. Service-related retail (from automotive to medical) has been in robust expansion mode as well. Meanwhile, food-related retail has exploded. Grocery, particularly small format niche players, continues to grow aggressively. Restaurants now account for roughly 50 percent of all the unit growth driving absorption in the marketplace. Five years ago, this category accounted for about 33 percent. Ten years ago, it drove just 25 percent of total unit growth.

And so, despite the gloomy headlines, the retail world is not monolithic. It may be a bundle of contradictions, but the news is not all bad. In the face of the greatest disruption since the rise of the American suburb, what has happened with retail real estate is a metamorphosis. Landlords have shifted tenant mixes, backfilling vacancies from contracting retail categories and seeing tenants expanding from other categories. Shopping centers have adapted; power centers, once the bastion of the big box, have embraced food retailers while malls have increasingly boosted their entertainment and dining options. Retail properties of all types have embraced non-traditional space users, with everything from medical offices to car showrooms to office co-working space.

Certainly there are plenty of challenges ahead. With just over 13 billion square feet of retail space, the U.S. currently has roughly 41 square feet of retail space for every citizen. This compares to about 20 square feet of space per capita in the United Kingdom, and slightly below that in France and Japan. The e-commerce piece of the pie continues to grow and will only do so with the continued rise of the millennial consumer.

In the meantime, look for overall rents to increasingly flatten and to head south for those property types and projects most significantly impacted by these trends. Most importantly, look for the gulf between the retail haves and have-nots to widen, with more closure and bankruptcy announcements ahead even while many concepts continue to grow. This will play out in the retail real estate world as even greater market bifurcation as performance between Class A properties and Class B and C projects widens even further. The properties that survive and thrive will be those that continue to adapt. Those that fail to do so will struggle to survive.

It’s hardly a rosy picture, but remember that even with the already massive disruption that has been engendered by e-commerce, overall vacancy levels have not only held their own so far, but declined. The reports of the death of physical retail have been greatly exaggerated.

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