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Taking the Temperature of Retail Real Estate in 2018

While there are sure to be dark days ahead for some, it is important to also acknowledge that the industry’s current woes are not insurmountable.

In light of recent headlines and store closing realities, it is not hard to surmise that retail is, in many ways, ‘under the weather’ and in dire need of a strong dose of direction and creativity. Credit Suisse predicts, in fact, that 25 percent of the 1,100 enclosed malls currently operating in the U.S. will shutter in the next five years. And though I don’t quite agree with that prognosticating and certainly not for luxury “A” malls in urban areas, there is a cautionary tale to heed—one that must entail a proper balancing act between three primary elements: bricks-and-mortar, e-commerce and delivery.

Still strong foundations

But isn’t bricks-and-mortar on the way out, you might say? Isn’t the Amazon factor completely destroying the traditional retail model? Not exactly. Currently, only around 9 percent of retail sales are conducted online. This is roughly the same percentage of non-traditional sales as took place through catalogues in their heyday. That said, online retail is sure to continue to rise; most likely into the 20-25 percent range over the next few years.

Invention and reinvention

To battle such dark days, mall owners are, in many cases, reinventing their approaches and their holdings.   They are realizing that they need to be more experiential in their thinking and choice of tenants. Millennials want experiences in order to get them offline and into the mall. This is best accomplished by striking a proper balance of retail and entertainment: Multi-plex movie theaters with concierge food and drinks delivered to patrons lounging in recliner chairs. Fun restaurant concepts. And non-traditional mall offerings that include swim schools and gyms. At the same time, mall owners are leasing space to more recession-proof medical clinics, schools and office users as complementary tenants and sources of income.

Special delivery

The real game changer in all of this though is delivery. Amazon Prime continues to lead the way and set the standard. E-commerce is all about convenience and is only going to get more competitive. Grocery chains continue to test same-day delivery as Amazon experiments with 30-minute drone drop-offs. Reinvention of approach and reach is benefiting the industrial real estate sector as retailers scramble to acquire geographically desirable and prevalent distribution centers. That was the gambit behind Amazon’s purchase of Whole Foods and its 460 stores. More locations, and in desirable zip codes, provide the opportunity to deliver fresh… and fast. And to remain competitive today also means offering shipping options that are fast and free (or as close to it as possible).

Autonomous: synonymous with evolution

While we are not quite talking about flying cars and “The Jetsons” and are most likely years away from any wide-scale use of autonomous vehicles, the possibilities for where such technology could merge with retail are simply fascinating.

You are at work and suddenly recall you have a formal dinner to attend that evening. Too busy to leave the office, you send your autonomous vehicle to bring back a new dress within 20 minutes’ time. Or, better still, the retailer delivers the apparel via their fleet of driverless cars.

Such a scenario and others like it could bring both positives and negatives for retailers and mall owners. While it would build brand loyalty with customers with superior service and convenience, customers would mostly likely feel less compelled to visit the actual store. This, in turn, could lower the possibility of in-store and in-mall complementary and impulse buys. At the same time, however, fewer customers at the mall would mean a need for less on-site parking; something that could enable the property owner to develop more outlying real estate onsite. Indeed, the possibilities are endless from both ends of the spectrum.

New moon on the rise

This year has begun a new chapter in retail’s survival of the fittest and most savvy. And while there are sure to be dark days ahead for some, it is important to also acknowledge that the industry’s current woes are not insurmountable—as long as the corrective salve is not the ‘same old’ but, rather, applied and in-step with constantly evolving consumer tastes, expectations and realities.

Lauren Leach serves as director with management consulting and financial advisory firm Conway MacKenzie. She has spent significant time working on leases for both institutional assets and CMBS workouts, actively negotiating over 8 million sq. feet in leases with a value in excess of $410 million. She also specializes in court-appointed receiverships, leasing matters, portfolio valuations and liquidations, and complex real estate negotiations.

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