With the growth of Amazon and other online retailing what can we expect for shopping centers and retail real estate?
Health and wealth communities are dependent on local shopping and access to services and entertainment. Single-family residential homes are also in some respects tied to the vitality of the shopping options in the immediate area.
Physical retail (“bricks and sticks” or “bricks and mortar”) is not going away and in certain situations is even growing. Retail has continuously evolved in the United States and has see a rather cyclical development. From the local general store, which was upended by the Sears catalog, who in turn started opening department stores, only to be replaced by Walmart and finally Amazon. Amazon, however, went full circle to buy Whole Foods and even open smaller bookstores marking an entrance into traditional retail for the online seller.
The U.S. Census Bureau in February, reported total 2017 e-commerce retail sales of $454 Billion thus making online sales only 9% of retail spending. At the same time, Brick & Mortar stores sales saw a rise of 3.4% in 2017 showing an overall growth of omni-channel retailing. Retailers that meet consumers physically and online will have the best opportunities to capture revenue.
Bricks & Sticks Fast Fact: Madison Avenue (57th – 72nd Streets) Retail Rent Per Square Foot = $1,390
Most of the store closings that are happening today are a result of the retail market bifurcating into more high-end and low-end retail. The stores that are selling commodity items in the middle that cannot provide the best price, more service or exclusive items are getting pushed out of the market.
Additionally, the US market has been overbuilt with much higher store accounts and retail space per square foot then the rest of the world. Part of the retail shakeout has been better locations growing at the expense of inferior locations.
In a broader context, there has been a shift to more experiences versus buying products. On the demographic side of things, the Baby Boomer generation is aging out of their peak spending years and being replaced by the Millennials, who in many situations may be still burden by student loans and higher consumer debt from the last crash.
The key categories driving retail’s current growth are food and beverage, furniture and furnishing, and health and beauty.
Bricks & Sticks Fast Fact: Aventura Mall, a 2.2 million square foot shopping center in Florida was refinanced for $1.75 billion in June 2018. Aventura Mall racked up gross sales close to $1.2 billion in 2017 putting it in the top five of most productive malls in the USA.
E-tailing just got a lot harder with the US Supreme Court decision in South Dakota vs. Wayfair granting States the authority to force online retailers to collect sales tax on purchases from residents of those states.
According to the Council of Supply Chain Management Professionals – Logistics Costs Rose to a Record $1.5 Trillion in 2017. Retail real estate and shopping centers in particular are well positioned to be the “last mile delivery” solution. Vacant anchor tenants and Big Box stores can easily be repurposed to convenience warehouse/distribution centers in densely populated urban/suburban areas.
Bricks & Sticks Fast Fact: Amazon paid $13.7 billion for a whole lot of brick and mortar with Whole Foods
All that spending on logistics and having to pay sales taxes on purchases is a leading indicator that consumers will be paying more for the convenience of delivery. Furthermore, Amazon’s in-house delivery skills have grown to be horrendous with more missed delivery windows for Prime service and throwing packages in front of doors or even in a lobby of an office building and calling it a delivery. Amazon raised the rates for Prime membership at the same time customer satisfaction is decreasing. The future of e-commerce will be both expensive and could include much more late or missed deliveries, thus being less convenient for the purchaser.
Another head wind facing e-commerce is the cost of customer acquisition through ads on Google and Facebook. While Facebook user growth has stalled, their ad rates have more than doubled from early 2017. Profit margins on e-commerce sales have always been less than brick & mortar physical stores. We at Concordia Realty see these facts as a positive trend for retail real estate investment and shopping center locations for tenants.
Estimates from Happy Returns Inc., a company that handles returns for retailers and manufacturers, estimates that the rate of return for online purchases is close to four times higher than the rate for physical-store sales. This creates problems for retail landlords who have their percentage rent impacted due to returns from online sales. Yet it does generate extra traffic for shopping centers because of the convenience of returning a purchase and or picking up other necessities during a trip.
Bricks & Sticks Fast Fact: Notable e-tailers opening stores include Allbirds, Boll & Branch, Bonobos, Casper, Everlane, Harry’s Razors, Warby Parker and Untuckit (shirts)
People tend to prefer to take back things so they can get return credits sooner. That could work in a landlord’s favor though, since returns generate extra trips to a mall. The additional foot traffic could be valuable, if shopping centers convert those additional spending opportunities.
According to a recently published report from IHL Group, retailers opened 4,080 more stores in 2017 than they were closing and plan to open over 5,500 more in 2018. Other highlights from the report “Debunking The Retail Apocalypse” include:
- 42% of retailers have a net increase in stores, only 15% have a net decrease, and 43% report no change.
- The three fastest growing core retail segments are mass merchandisers such as off-price retailers and dollar stores (+1,905 stores), convenience stores (+1,700 stores) and grocery retailers (+674 stores).
- When it comes to chains shuttering stores, only 16 chains account for 48.5% of total number of stores closing. Five of these chains (Radio Shack, Payless Shoesource, Rue21, Ascena Retail and Sears Holdings) represent 28.1% of the total stores closing.
When you examine the Toys ‘R’ Us debacle, it becomes apparent that the company struggled with a crushing debt load that had accumulated prior to 2005 which prevented them from improving stores. Additionally, they had a wide array of products yet no opportunity for sales to help service customers. The biggest two blows to Toys “R” Us were Walmart and Target. It should noted that Target’s toy sales have grown each quarter for the past four years.
Bricks & Sticks Fast Fact: Apple has 502 retail stores in 24 countries. 272 stores in the United States
So should you invest in shopping centers and retail real estate? If you are looking for stable returns that are non-correlated to the stock market the answer is yes. This is backed up up by reports from MSCI, a leading global investment research firm, and others that “over the past five years, retail real estate assets have produced an annualized total return to investors of 10.4%, compared to 10% for non-retail real estate investments”.
As can be seen by Amazon’s investment in Whole Foods, grocery anchored shopping centers create regular trips to the store by consumers. Value format retailers including Dollar General, Dollar Tree, TJ Maxx, Ross and Aldi are all thriving. Restaurants, health clubs, haircuts and medical uses will not be migrating online for the foreseeable future.
Retail real estate whether it be shopping centers or single-tenant net-leased properties can provide the long term stability of the worlds most recognizable brands coupled with lower risk because the tenants pay the operating expenses. Concordia Realty provides opportunities for individual investors to create wealth and cash flow by owning a piece of main street.
For more information please visit www.concordiarealty.com