Retail Seeing Price Gains As It Adapts To Contend With E-Commerce
It's no surprise that of all five asset classes, retail has been the slowest to gain traction coming out of the recession. The sector has had to contend with a loss of foot traffic, declining sales and rapidly changing consumer preferences—all of which point to the rise and prevalence of e-commerce.
Deal volume has declined compared to the year-ago quarter, according to a recent Ten-X Research market outlook report, dropping to 11% within the past four quarters. On a positive note, vacancy rates dropped 120 bps in Q2 compared to the year-ago quarter with absorption outpacing completion in the past four years. Overall price growth has also been resilient in the sector, growing slowly but consistently since 2012.
"Brick-and-mortar is in a constant battle," Ten-X Research chief economist Peter Muoio tells Bisnow. "We've had low improvement in vacancy margins and rent gains because retail is having multiple different impacts on demand for brick-and-mortar—the most obvious is stores are going out of business. There are very few bookstores, record stores or electronics anymore."
Overall cap rates are declining, Ten-X reports. Strip malls and anchored centers have seen cap rates drop below the 7% range within the past five years, while single-tenant properties' cap rates are now below 6%. REITs are also increasing their acquisitions of single-tenant properties—where pharmacy-based stores like a Walgreens or CVS might be based. According to Ten-X, these properties tend to present minimal risk and require little upkeep on the landlord's part.
Though e-commerce presents constant competition, brick-and-mortar retailers are adapting to the change in demand by ramping up their online presence and increasing their use of warehouses and distribution centers to meet consumer demands for online purchases. Several retailers this year alone have removed underperforming stores from their portfolios in an effort to focus more capital on improving online sales. Back in August Macy’s announced it would close 15% of its portfolio, or 100 stores, starting next year—and Sears has closed both Sears and Kmart stores amid its $9B in losses.
"The more insidious element is retailers are shrinking the footprint of their stores because they're changing their response to e-commerce," Peter tells us. "They're not carrying as much inventory in stores and are changing the way they deliver merchandise to the customer."