The Future of Retail Space | Riverdale Funding

The Future of Retail Space

Sep 26, 2017

It’s tough to stay abreast of all the news affecting commercial real estate, but we don’t have to tell you how important research is to success. Every event has an impact, whether it be changing consumer preferences or a boom in an industry – and the effects can often be observed even within various types of commercial loans.

That’s why we began compiling our quarterly market reports. We’ve organized the best research from thought leaders in and out of the commercial real estate market to help you make sense of industry trends – and capitalize on your knowledge.

Below we’ve organized an excerpt from the Riverdale Funding Q2 Market Round Up, where we took a nuanced dive into an underscoring question on the minds of commercial real estate investors, commercial real estate lenders, and commercial mortgage brokers alike: “Is Commercial Real Estate at Its Peak in 2017?” Check out our discussion about the retail sector below, then download the full report on our Market Reports page.

Is there a Future for Retail Space?

As the dawn of the digital age sheds more and more of its light on the commercial retail sector, the market appears increasingly hostile to brick-and-mortar businesses. For traditional big box stores, the devastating results have filled headlines for the first two quarters of 2017.

What’s more, the changes for large mainstay retail brands haven’t been isolated to one type of product or group of companies. Alongside major box stores such as Macy’s, J.C. Penney, and Kmart, clothing retailers such as Dress Barn, Ann Taylor, Lane Bryant, and more have all announced sweeping closures – and with these closures, it seems the vultures are already circling the American mall.

The culprit almost goes without saying: Online shopping.

As major online retailers such as Amazon continue to hack into the market share of nearly every retailer in their path with an unparalleled selection, tailored customer-first approach, and innovative (and fast) delivery options, they don’t appear to be slowing down. In fact, just the opposite.

While it’s no surprise the retail market is in a state of tumult, real estate investors need only look to a few retail leaders who are re-envisioning the purpose of retail space in the future.

Reimagining Malls in 2017

Nearly every major publication has attempted at some point or another within the past five years to predict the time of death for the American mall. However, retail in Q2 of 2017 has experienced something more ominous, with the closure of hundreds of anchor stores.

Anchor stores such as Macy’s, Sears, and J.C. Penney serve malls in two key ways. They provide a wide selection of products, ranging from clothing and housewares to decor and electronics. However, they also provide reliable income due to long-term leases (think 10 years).

A few well-placed anchor stores on opposite sides of a mall provide foot traffic to smaller, niche stores. With anchor stores gone, not only do commercial real estate owners lose income, but smaller stores lose traffic.

Can a mall without anchors weather the storm? As it turns out, yes.

One promising strategy which has already begun to see some success is replacing these vacant anchor stores with non-retail spaces, such as recreational, educational, or entertainment centers.

National mall operator, General Growth Properties, has realized a powerful version of this approach as the first mall to sign a deal with Mexico-based KidZania, an experiential learning center for children. In just a few short months, this chain has begun settling into abandoned anchor spaces and revitalizing malls by giving families an experience that doesn’t necessarily involve leaving with bags in hand.

The path forward for brick-and-mortar spaces to weather the online retail storm may be to no longer serve exclusively retail purposes.

Changing Retail for a Changing Market

While the physical store is certainly losing ground to online sales, its dominance of retail is still huge. At its core, the question traditionally brick-and-mortar sellers must ask is this: “How can we use our physical space to provide an experience our customers can’t get online?”

Their answers have been varied, but we can look to the most successful innovators for clues as to the future of non-mall commercial retail spaces. Notably, one online innovation, Amazon, made waves on June 16, 2017 with its $13.7 billion purchase of upscale grocery chain, Whole Foods. While this acquisition made waves, the company had already developed Amazon Go, a brick-and-mortar store which uses a shopper’s smartphone to provide a seamless, lineless, cashier-less grocery experience.

This grocery experience is impossible to both brick-and-mortar only and online-only retailers; rather, a hybrid approach to serving consumers that other retailers find themselves creating within their own markets. The women-led startup, Bulletin, indicates the value of the physical space to traditionally online-only brands. Bulletin operates like a co-working space, renting out small areas to complementary (but not competing) online brands which all fit into a unifying theme or topic. Ultimately, this strategy provides income for the owner of the retail space, Bulletin, bypasses the traditionally long lengths of retail leases, and gives these online retailers access to the strongest advantage of physical retail spaces: the ability to touch and feel the product.

Companies like Nike and Adidas have found their own ways to create the bridge between experience and retail. In late 2016, Nike unveiled a flagship NYC retail experience, complete with mini-basketball court, soccer enclosure, and treadmill/monitor experience to simulate running in various conditions -- oh, and a lot of products. In 2017, Adidas began testing small pop-up storefronts with body scanners and 3D-knitting technology to provide tailor-fit products in a matter of hours.

Large store closures do not spell doomsday for CRE

Investors in the retail sector may see a bleak horizon for physical spaces, but large store closures don’t necessarily spell doomsday for commercial real estate. Just like the thousands of brands looking to adjust to an increasingly digital retail landscape, investors in the retail sector must proceed with caution and rethink the way retail works. As consumer patterns change, so will the integration of digital methods into the sales process, but the physical store will always have a place.

There may be only one change we can be certain of: What consumers expect from a store -- and how brands use commercial real estate to provide it -- is sure to grow beyond simply a cash register and products.

Read More in Our Q2 Market Report

If you’re anything like us, you could read about commercial real estate all day. If you’re eager for more researched analysis of the commercial real estate sector, take a minute to visit our CRE Market Reports page. Here you can find an archive of our most recent market reports, available for free download.

Or check out another summary from our Q2-2017 report, “Hotel Ownership in an Airbnb World,” then keep your eye out for our Q3 report next month.

As always, happy reading!

 

This article is a part of our Getting a Commercial Loan: Complete Guide, a comprehensive resource for anyone looking to secure a commercial loan. Read more at the link.