E-commerce’s explosive growth has diverted revenue from physical retailers, forcing many to shutter stores. Those without thriving online portals and sophisticated distribution networks face serious long-term viability concerns, as Amazon and others diversify.

Brick-and-mortar retail is demonstrating its resilience by adapting to compete with online retailers. Experiential concepts, dining and convenience stores are irreplaceable online. Another force benefiting e-commerce is Americans buying fewer commodities and instead investing in travel and experience. RSM Real Estate Valuation & Advisory Director Kenny Kim keeps careful track of how e-commerce is impacting retail, and new trends in retail, and laid out some of the big shifts.

Bisnow: How has the tremendous growth of e-commerce affected retail?

Kim: Retail real estate is going through a transitional phase. As technology continues to improve, retail sales via e-commerce continue to grow at a fairly quick rate. People are spending more time on their mobile phones and tablets, and these devices are becoming the gateway to the retail business. According to U.S. Department of Commerce data, online sales increased year-over-year at an average of 16.9% over the past 15 years, as total retail sales grew just 4% during the same period. Fifteen years ago, e-commerce captured only about 1% of total sales versus about 9% today. This is having a material impact on the tenant demand for physical retail space, which is already oversupplied in the U.S. The U.S. reportedly has about 24 SF of retail space per capita versus about 16 SF per capita in Canada and only about 12 SF per capita in Singapore, which is known to have the highest retail space per capita in Asia.

Bisnow: How has e-commerce forced traditional brick-and-mortar to adapt and evolve to a new competitive environment? How are the physical retail properties transforming?

Kim: Class-A malls and lifestyle centers are expected to continue to thrive while increasing their experiential elements. Alternatively, Class-B and C malls may require greater capital investments to refresh, repurpose and address physical and functional obsolescence. Some outdated retail assets will need to be razed for a better alternative use. The tenant mix at malls will change with the shifting market dynamics. Fast fashion will continue to disrupt the apparel business, and more off-price retailers will provide shoppers the “treasure hunt” experience. In the grocery store space, Amazon is expected to integrate its online capabilities to the Whole Foods markets, and others are expected to follow suit like the joint efforts by Google and Walmart Grocery. Landlords will seek tenants that are experiential-focused, such as food and beverage, entertainment, gyms and services. In Asia, many malls have recently almost doubled the food and beverage tenants, enabling landlords to combat the increasing pressure to maintain historically strong occupancy levels.

Bisnow: What are some challenges in valuing retail properties as a result of e-commerce growth?

Kim: Since most institutional-grade retail assets are valued on the basis of a discounted cash flow analysis, the numerous assumptions made over the hold period require thoughtful inputs. As e-commerce continues to grow, much greater thought and analysis will be required when valuing retail real estate. Retail property dynamics will evolve, and as store closures continue to increase, occupancy levels at retail malls may deteriorate swiftly.

In our next installment, Kim will discuss some important new valuation considerations and challenges for retail.

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