Amid Rising Tide Of E-Commerce, Brick-And-Mortar Retail Weathers The Storm
Want to get a jump-start on upcoming deals? Meet the major Chicago players at one of our upcoming events!
Brick-and-mortar retail is caught in a perfect storm. Over the last decade, news of store closings and sightings of empty malls have led many consumers to the assumption that physical retail is struggling. As e-commerce grows increasingly popular among American shoppers, traditional retailers have increased their online presence, and that has driven down occupancy. Retail landlords saw vacancy rates rise to 10.3% this year, RSM reported.
But physical stores are still in high demand. Although rent growth for brick-and-mortar stores slowed from 2% in 2017 to 1.5% in 2018, rents are still rising.
While some store owners have not fared well in the fight against e-commerce, many retailers see changing consumer preferences as an opportunity to reinvent themselves. Instead of surrendering to e-commerce giants like Amazon, companies are transforming tired assets into experiential, small-format spaces. The goal is to complement e-commerce activity, not work against it.
Staying Relevant In The Digital Age
Consumer preferences are shifting toward a digital transformation, and e-commerce data tells a story of the modern customer experience. On Black Friday, online sales jumped to $6.22B, up from $5.03B in 2017. But this 23.7% increase in online sales only resulted in a 1.7% decline in store visits year over year, some of which can be attributed to the extreme cold that gripped the Northeast over the holiday weekend. Retail is not a zero-sum game where online gains mean brick-and-mortar losses. In fact, traditional brick-and-mortar retailers like Walmart and Best Buy have posted strong gains throughout 2018 as omnichannel retail strategies have taken off. Target has stayed healthy by being one of the leading forces in the small-format movement, bringing brick-and-mortar stores into central locations in major cities, making them increasingly accessible to consumers.
With the increased cost of home delivery services, the small-format model in city centers cuts costs by allowing customers to pick up online orders in person. But while traditional brick-and-mortar retailers are adapting digital concepts, the opposite is also happening. Online retailers like Amazon and Wayfair are looking to build their brick-and-mortar presence to expand their point of sales and capture more market share. These physical locations offer what online stores can’t: an opportunity to communicate with customers face-to-face, build relationships and create real-life experiences. Amazon, which launched its first brick-and-mortar bookstore in 2015, is now one of the largest bookstore chains in the U.S., bringing a personalized bookstore experience to 17 physical locations. The company has plans to expand into several additional locations over the next year.
The Stores That Didn’t Make It
While many brick-and-mortar retailers adopted this multichannel approach early on, some didn’t evolve fast enough. Sears Holdings, for instance, which owns retailers Sears and Kmart, announced in August plans to close 46 stores in November. Now, the company has made plans to close 142 more stores by year’s end. Toys R Us experienced a similar defeat in March when CEO David Brandon announced the company would close or sell its roughly 700 U.S. stores.
While these events have harmed a number of communities and left thousands of American workers without a job, they have also provided an opportunity for property owners to reposition these assets. Landlords can reap the benefits of former retail centers by creating mixed-use spaces, incorporating hotels, office and multifamily assets, increasing the value of their properties.
“In many cases, these owners have been unable to embrace the trend towards mixed-use real estate, where people can eat, work and play, due to their co-dependence on these anchor tenants,” RSM partner Troy Merkel said. “By removing the shackles of anchor leases, owners can now transform their assets into smaller footprint retail with office, hospitality or residential on top.”
Macerich, a REIT and one of the country’s largest mall owners, is one landlord repositioning big-box retail assets. Macerich recently launched BrandBox, a concept that functions as a WeWork for retail companies. BrandBox fills big-box spaces with modular units, leasing them to smaller, shorter-term tenants. BrandBox gives traditional online retailers and startup brands an opportunity to test brick-and-mortar locations.
“This type of collaborative design and flexibility may provide insights into the future of big-box retail space,” RSM Senior Manager Laura Dietzel said. “If both landlords and retailers are willing to think differently about changing customer preferences, the retail apocalypse might just become the next retail real estate renaissance.”
This feature was produced in collaboration between Bisnow Branded Content and RSM. Bisnow news staff was not involved in the production of this content.