By Brandon Wilhite
As consumer buying patterns continue to shift increasingly towards e-commerce and away from traditional brick-and-mortar retail stores; retailers, property owners, and investors must continue to evolve and adapt.
And while draconian and sensationalistic terms such as “Retail Apocalypse” are often mentioned, the future is not so bleak for the shopping center industry. The term “apocalypse” implies a dramatic end, and while several prominent retailers have been forced to declare bankruptcy (so far 19 and counting in 2017), brick-and-mortar is here to stay with no such end in sight. Instead of an apocalypse, retail is experiencing an adjustment. Perhaps “Retail Renaissance” might be a more appropriate term.
To put the trend in perspective, e-commerce’s market share has been predictably and steadily growing since the mid-2000s, which has allowed market participants plenty of time to make adjustments. Long foreseeable trends do not wipe out entire industries. And while many brick-and-mortar retailers have fallen victim to e-commerce’s growing market share, traditional e-commerce players- most notably Amazon- are now moving into physical retail themselves.
The move of online retailers into brick-and-mortar locations is driven by factors including shipping and logistics costs, as well as increasing product and service offerings. Both traditionally online and brick-and-mortar retailers alike are realizing that, in today’s marketplace, a combination of physical stores and an online presence are necessary to succeed in today’s competitive landscape. Case in point, J.C. Penney CEO Marvin Ellison recently noted in a real estate conference that when the company closed a physical store in a given market, online sales dropped in that same market as a result. While today’s consumer enjoys the convenience of shopping online, they also want the convenience of having access to a physical store in order to make returns, exchanges, etc.
Additionally, while consumers certainly enjoy the convenience of shopping online from the comfort of their couch, humans are still social creatures seeking experiences. We still want the ability to see, touch and experience products. Savvy brick-and-mortar retailers will seek to lure consumers into physical stores by offering product demonstrations, complimentary food and beverages, and bundled service offerings. Other retailers will seek to help facilitate online purchases from within their physical locations, thereby simultaneously removing the logistics burden from the consumer and the inventory burden from themselves.
Investors and developers who are keenly aware of these trends and how they will impact existing and future retailers will earn strong returns on their investments. Capitalizing on that knowledge may prove challenging, as retail trends have “spooked” the capital markets. Year-to-date through June, retail property sales are down 24% year-over-year, compared to a decline of only 5% year-over-year of the market as a whole. Prices on retail properties were down approximately 1.6%, while prices on all other property types were up over the same period. It is not only buyers, but also capital sources (both lenders and equity investors) that may need some convincing. Many capital providers may seek to limit their exposure to retail, especially considering the trends seen in the broader markets.
Despite the challenges with financing retail, Metropolitan Capital Advisors (“MCA”) has successfully financed several retail properties over the last 12 months including 2 distressed power centers with vacant junior anchor spaces, a retail land development loan, along with several full-leveraged permanent fixed-rate mortgages with cash-outs to borrowers. Since our inception over 25 years ago, MCA has arranged financing on virtually every type of retail asset across the country; this has given us valuable knowledge and insight into the retail sector.
The author, Brandon Wilhite, is a Senior Director in the Dallas office of Metropolitan Capital Advisors. Brandon can be reached at [email protected] or 972-267-0600.