Retail Real Estate: Not a Demise, But a Reconfiguration

Wednesday, September 20, 2017TOPICS: Innovation and EntrepreneurshipGuest SpeakersConferences and WorkshopsAlumni

Panelists
begin quoteWhy would anyone want to invest and develop retail real estate?

On September 14, the Burnham-Moores Center invited real estate industry professionals to the University of San Diego’s campus to discuss “The Changing Face of Retail.” Panelists Ryan Perry, senior general manager of Westfield UTC; Anjee Solanki, national retail director of Colliers International; Stuart Tanz, president and CEO of ROIC; and Jim Young, co-founder and CEO of Realcomm, along with moderator Brad Geier, co-managing partner of Merlone Geier Partners, opened up about the big question on everyone’s mind; Why would anyone want to invest and develop retail real estate? The deliberation brought forth information on factors currently influencing the market and the predicted components of transformation of retail space. 

The landscape of the retail market is more dynamic today than ever before. Panelist Jim Young described the main elements currently shaping today’s retail industry: the desire for human social interaction, the industry’s reputation of poor customer service, threats from online retail, inventory issues, obsolete design, and the omnichannel. Omnichannel is defined as a multichannel approach to sales that seeks to provide the customer with a seamless shopping experience whether the customer is shopping online from a desktop or mobile device, by telephone or in a bricks and mortar store[1]. Most individuals would say that the threat from online ecommerce is the biggest consideration for future evaluation of retail assets.  While only 10 percent of the market is driven by online sales, this figure is expected to grow substantially over the next couple of years. This kind of market infiltration will force retailers to change how consumers purchase products.

The retail sectors will not only see evolution in product distribution but also in consumer shopping patterns. Every year, $3.2 trillion dollars are spent at brick and mortar stores. While spending dollars per household has gone up, the amount of products purchased has gone down. Consumers are becoming concerned with where their products are made and the quality of design. The challenge for retailers today is how to visibly place their products where people spend their time and create social interactions that construct brand loyalty. Panelist Ryan Perry discussed the increasing demand for retail space for brand marketing “pop-up” stores. Companies like Tesla, Amazon, and Warby Parker are signing short-term leases in an effort to create a physical presence with consumers. The invention of these “pop-up” locations challenge current leasing techniques like sales percentage lease agreements. The big question for investors will be: how do you appraise a space that does not have a sales cash flow?

The pace of change in the retail sector is accelerating and real estate developers will have to adapt quickly in order to stay “in the game.” The panelists gave insight into the question: What are some of the innovations we will see in retail space in the future and how will this change the way the market does business? Panelist Stuart Tanz stated that property owners will need to choose tenants who are online resilient. He believes that necessity-based retail like drugs stores, eateries, and grocery stores—especially ethnic markets—will see consistent demand. However, grocery stores may experience a downsizing shift, from around 50,000 square feet to about 25,000 square feet. Strip malls will also need to add designated parking spots for home delivery drivers. Large retail suites may reconfigure their sales floor to encompass a “stores within stores” format. Each product category is designated with its own sales floor space and graphics, in addition to a knowledgeable and highly trained sales associate. The goal is to create an inclusive and personalized customer experience. This was one technique that proved successful for the last remaining tech retailer, Best Buy. Consumers will look to spend their money at shopping centers that offer a cluster of specialized units like health, wellness, and beauty. Nordstrom is currently testing a new, 3,000 square foot, serviced base, retail concept with no inventory. This micro store will offer services from personal stylists, tailors, and manicurists. Stuart also predicts that stores may adopt virtual reality shopping experiences in retail spaces where orders are placed in stores and later shipped from warehouses. 

Factors influencing the market have indicated that big box retailers will have to change. What does this mean for the space they occupy as anchor stores in power centers or regional malls? Ryan Perry believes we will begin to see new retail categories that become a part of the consumer’s community. Suites vacated by Robinsons May and Sears are now being redeveloped as fitness gyms, movie theaters, offices, and multifamily units. In addition, panelist Jim Young, who is a tech futurist, predicts that an alternative use for these anchor spaces may be production facilities when 3-D printing becomes more efficient. 

All panelists brought forth a unique outlook on the future for the retail market space industry but, one thing they all agreed on was the necessity for asset class diversification within individual large-scale properties. Consumer trends seem to favor redevelopment that creates “town centers” that include dining, fitness, office, and residential spaces, all in one. With the growing threat from the ecommerce market, brick and mortar retail investors will need to create a innovative consumer experience that is both convenient and customer service friendly. 

By Taylor Stack, MSRE Candidate

[1] Rouse, Margaret. “What Is Omnichannel? - Definition from WhatIs.com.” SearchCIO, TechTarget, Feb. 2014, searchcio.techtarget.com/definition/omnichannel.

Contact:

Diane Ice
dice@sandiego.edu
(619) 260-2379