Known as the Oracle of Omaha, Warren Buffet has built a solid reputation as one of the world’s most revered, most influential, and most followed investors. When he makes a prediction – especially when it focuses on commercial real estate – we all listen intently.
At Berkshire Hathaway’s annual meeting held in early May, the billionaire investor forecasted a total change in the retail industry within the next ten years as it heads into a predominantly online model. It’s not just rhetoric; Buffet’s investment firm sold off $900 million in Walmart stock, even as the multinational retail corporation of grocery and superstores invests billions to compete with Amazon. Reviewing an ever-increasing list of retail stores closing this year, from Radio Shack’s 552 locations to 138 JCPenneys, as well as 70 Staples and Sears sites, it’s impossible to ignore the fast-shifting, downward trends of brick-and-mortar retailers.
Buffet isn’t alone. According to asset management company Cohen & Steers’ recent report, “We see this retail weakness, which is occurring despite a relatively healthy economy, as part of a permanent evolution in how and where Americans spend their money. We expect the paradigm shift taking place to dramatically alter the retail landscape, with potentially significant implications for real estate investors.”
So how does the commercial real estate industry adapt to this stressful evolution and shore up a rough retail real estate market? Perhaps the answer involves persuading brands – and building owners – to be more flexible. A study from commercial real estate services firm CBRE reveals the average length of a retail lease is currently around five years, down from 20 years in 1991. They’ve coined the term “rogue retailing” to describe a new model that requires more flexibility on the parts of both landlords and retailers in order to compensate for greater risk involved when setting up shop in the market.
Traditional shopping experiences are being re-evaluated as they’re influenced by new ideas and online effects. Technology and behaviors are changing too quickly to carry long-term, massive real estate buildouts, and long-term leases no longer make much sense.
Enter: the pop-up shop.
While the cost of retail real estate is projected to increase by only one percent in 2017, the pop-up industry was valued at $50 billion in 2016. Also known as flash retailing, pop-up endeavors have created entirely new marketplaces to allow for their ease into commercial real estate, like those companies offering “retailer in a box” services to help with concept, staffing, and set up supplementation.
At a time when retail landlords are fighting alarming vacancies, pop-up shops attract fresh traffic, revitalize dying properties, and bring additional rental income. While developers aren’t encouraged by the direction of retail, they realize their bottom lines favor the increase in income. As the saying goes, empty space doesn’t pay the rent.
Are we headed into a future without retail stores? Probably not. But no matter what side of the commercial real estate industry on which you may find yourself, the keys to success and profit involve flexibility and a willingness to readjust on the fly.