What is the Real State of Retail Real Estate?
Chris Ressa cut his teeth in commercial real estate as a real estate representative for Sherwin Williams Paint Company. Historically, Sherwin Williams dominates the contractor market. The growth opportunity with higher margins is in the DIY market.
As a real estate representative, Chris was charged with finding new locations for stores in markets that Sherwin Williams wanted to expand market share. He worked with local brokers, negotiated leases, and gained critical insight how national tenants view retail space.
Here he was exposed to the thinking and strategy that national retailers invest in Identifying markets, time lines, and the value placed on space and lease negotiations.
When he moved to the real estate brokerage side of the business, he found that his experience was helpful, but, real estate is still real estate. You have to execute.
Real State of Retail Real Estate
What is the real state of retail real estate? For context, it has to be stated that the consumers demand drives retail real estate. Second, the consumer’s behavior has led to the creation of multiple significant asset classes.
The different types of Retail Real Estate include:
- Enclosed Malls
- Outlet Centers
- Power Centers
- Grocery Anchored Centers
- Neighborhood Centers
- Free standing buildings
- Lifestyle Centers
- Mixed Use Developments
For this reason, you have to get granular to understand the nuances of each when underwriting a property, because they all operate differently. You have to consider what type of retail will create the best opportunity for a tenant.
Disruption in retail is nothing new. But, not that long ago, the tenant list of an enclosed mall was about 70% leased to fashion and apparel. Then the outlet center created a direct to consumer opportunity for brands.
Next was the category killers, the power centers that provided all of the brands and categories under one roof; think Dick’s Sporting Goods and Office Depot/ Office Max.
Then the multi tenant buildings with the front and center impulse buy, ie Starbucks.
Lifestyle centers include high end fashion, plus mixed use, are walkable and may include dog parks.
Now, online sales are changing how the retail consumer buys. It’s easy to point to Amazon and the volume of sales generated, but there are no known cases where a retailer went out of business because of an online competitor.
Online sales has made most retailers better. Now the consumer can order online, and pickup at the store.
It’s often reported that Toys R Us, a fortune 300 company, went out of business due to online. Their annual revenue was $11 Billion. The truth is they were over leveraged and they could not service their debt.
Online versus Brick and Mortar
Retailers are finding that when they open a physical location in a market, that their online sales increase and the reverse holds true when a location closes. Good retailers are figuring out how to add to their bottom line and make the consumer experience frictionless.
A recent study shows that approximately 85% of consumers who order online and pickup in the store will make an additional purchase at pickup.
Right now, in order to get consumers in the habit of ordering online, retailers are providing free shipping and returns. Will free shipping continue to be offered as retailers build more brick and mortar locations for consumers to return the unwanted purchase?
The cost to start an online business is nothing compared to a brick and mortar business. But, to grow beyond $10Million in sales, retailers are finding that a physical presence is needed. At this level, the customer acquisition cost is actually less for brick & mortar versus online.
Multiple online brands are opening multiple physical locations to lower their cost. Product distribution necessitates it. Warehousing, retail and online are all working together.
Other brands are working to limit the number of outlets for consumers to buy in order to keep the value of the brand high, ie Nike.
Brick and Mortar Long Term
Brick and mortar has a convenience edge for the consumer who needs something right now. Combine this with evolving experience and physical locations for retail real estate is not going anywhere. For the customer who needs service, a chat bot is no comparison to a live meeting with a person in a physical location.
The store prototype is changing. Brands are trying to determine the ideal square footage, product mix and layout to meet the consumer needs.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
So I think both from a real estate end and a retail end. The BIGGEST RISK is human capital.
When you have an industry. That’s been hammered by Headline News, both the retail and the real estate. When someone is really bright, and smart graduates college, is that the industry they want to get into? And to solve the problems and the challenges that we were just talking about, you need really sharp, talented people. From an industry perspective, I always want those at DLC, but from an industry perspective, retailers, real estate, everybody needs really smart, sharp, talented people.
Getting the bright, sharp people into retail store management training programs. I don’t know the last time you talked to a millennial, but when was the last time they said, when I graduate college, and I want to be the store manager of Wal-Mart. I don’t hear a lot of people doing that. And I think it’s a great job. And there’s a great career path.
But the biggest risk is human capital, both on the retail side and the real estate side. In the Great Recession and the real estate side is not limited to my world, but in the Great Recession, you know, in all commercial real estate, very few people were hiring in 2008 to 2012. So you have this labor shortage.
And I think the greatest risk is in commercial real estate and retail. If all the most talented people in the world move over to the tech world and no one comes into real estate, I think that’s the greatest risk the industry has.
For more go to:
Podcast: Retail Retold