Don’t count bricks-and-mortar retail out. It’s still more profitable than e-commerce, and online retailers are starting to pay attention to that, according to a new report released by CCIM Institute, a commercial investment real estate organization, and the Alabama Center for Real Estate.
The industry is rapidly evolving against the threats of e-commerce that has taken the blame for the glut of bankruptcies and store closings over the past decade. One in four malls are expected to close by 2022, and retail space is predicted to contract by more than 50%.
Still, CCIM Institute Chief Economist K.C. Conway says a “retail e-volution” is underway. “This report is not another examination of retail’s demise, because quite the opposite is occurring,” says Conway. “With total retail sales increasing at an average annual rate in excess of 4.35 percent, this is a story of how retail will continue to grow and evolve, fueled by e-commerce, technology, logistics, and innovation.”
The report blames the increase in retail bankruptcies and closings over the last few years on overleverage and being “over-retailed,” and not reflecting changes in consumer spending.
But retailers are starting to take note: Online apparel retail is less profitable than bricks-and-mortar stores despite the rapid growth of e-commerce (a 32% profit margin versus 30%), the report says.
CCIM and Alabama Center for Real Estate report detail five predictions for the future of retail real estate:
1. Online retail sales will double by 2025.. This will partly be driven by online grocery sales. U.S. online grocery sales will comprise 20% of the total grocery retail sales—some $100 billion—by 2025. Grocery stores will shrink to a third or half their current size with a more limited, locally curated inventory.
2. Experience and service reigns. Providing experiences and services (such as co-retailing in hospitality and airports) will redefine brick-and-mortar success, the report notes. Hotels will become new showrooms for retail. “Retail will also benefit from the ‘halo effect,’ whereby online sales result in brick-and-mortar sales and vice versa,” the report notes.
3. Speedy deliveries. “To make delivery/last-mile fulfillment more cost effective, changes are needed in infrastructure and logistics, combined with innovation like autonomous trucks and new warehouse designs,” the report notes.
4. Adaptive reuse of retail centers and malls. Researchers called this the most impactful trend for retail between now and 2025. They point to the example of The Howard Hughes Corp and its plans to transform the Landmark Mall, located in an opportunity zone in Alexandria, Va., into a mixed-use property with a hotel, residential, retail, office, and other public facilities. “With capital and debt markets pulling back from retail due to overleverage and record-setting loss severities, this revenue could be replaced by deferred capital gains via qualified opportunity zone funds,” researchers note.
5. Property tax woes to grow. Property tax issues in retail will likely get more litigious by 2025. “Where will states make up this revenue deficit to fund an already financially strapped education system?” the researchers ask.
Source: “Commercial Real Estate Insights Series: 3Q 2019 Report,” CCIM (Sept. 25, 2019)
