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Future of Retail Real Estate

Retailers across America are closing stores at a record pace. The commercial brokerage industry projects that over 8,600 retail locations will close in 2017, which is greater than the number of closings during the Great Recession of 2008 through 2009.

The future of malls is in question as major anchor department stores continue to report declining sales, with long standing retail giants like Sears near bankruptcy. Experts predict that up to half of the malls in America could close in the next decade.

Ironically, despite these projected store closures, overall retail sales are actually increasing. In 2016 according to the US Census Bureau, gross retail sales increased by 3.3% over 2015 to $5.5 trillion, including a 4.1% increase in the 4th quarter of 2016 over the same period a year earlier.

So why are brick and mortar retailers closing their doors in record numbers while retail sales are increasing? The cause appears to be past overbuilding of brick and mortar stores and a massive shift in the way people shop. In 2012, roughly 10.5% of retail sales took place online. Today that number has increased to 15.5% and the pace seems to be accelerating. The retail industry is witnessing a shakeout not seen since the super stores and category killers like Walmart, Target, Barnes & Nobel and Toys “R” US killed the small mom-and-pop Main Street retailers of yesteryear.

The current trend in retailing from in-store to online is also having an impact on retail real estate. What seems clear is that the demand for traditional retail space needed to support traditional retailing is likely to plateau or shrink over the next decade as traditional retailers require less space. That could mean flattening or declining retail rents in many markets around the country as competition increases among owners of retail real estate.

This trend is likely to be most acute for large box retail space and malls currently occupied by stores that are most at risk from ecommerce. How quickly this trend unfolds is difficult to gauge, but if online sales continue to accelerate, we could see dramatic changes to brick and mortar retailing in the next ten to twenty years.

But, whenever there is a changing landscape, interesting adjustments start to take place. In some cases, old malls that closed have been repurposed to serve other uses, some even more profitable for real estate investors. Empty store front retail spaces make good patient friendly locations for health care professionals. Also, demand for industrial warehousing space is increasing as online retailers, like Amazon, expand their distribution networks. Empty malls and big-box retail space may become the next distribution centers for ecommerce as the companies like Amazon shorten the time from ordering to delivery. Another interesting trend is a move by online retailers, like Amazon, to brick and mortar locations. Amazon recently opened a physical store in New York City, the first of what will likely become a new network of brick and mortar retail stores.

Despite the trend away from traditional retail stores to online shopping, there are retailers that have been able to buck the trend. Luxury retailers that have strong brand identification and don’t sell products online, continue to be successful against the ecommerce world. This is also true for many clothing stores where shoppers like to try items on before buying. But even these types of retailers may feel the impact of technology as things like virtual reality improve making visits to physical stores less interesting to shoppers. Of all the segments of the real estate industry, the retail area is the one undergoing the most change – but this may also open up new opportunities for investors.

William Small, CCIM is the Founder and CEO of Zenith Realty Advisors, LLC, a commercial-investment real estate advisory and investment firm. If you’re interested in receiving his monthly investment reports, you can reach him at (970) 925-3866 or by email at William.Small@ZenithInvestment.com.

About The Author

William Small, Zenith Realty Advisors

William Small brings over 28 years of experience in all aspects of commercial real estate to Zenith Realty Advisors. Based in Aspen, Bill Small provides commercial real estate investment consulting and advisory services to major US and foreign corporations and institutions.