Emerging Trends in Real Estate - Retail

The retail sector has two principal types of investors: those who have deep experience and those who tend to react to headlines. The former find it a promising sector for 2017. The latter are net sellers.

Concerns about retail continue to pop up in our annual Emerging Trends survey, which places the stores sector last among the major property types. On the investment side, retail came in dead last, even lower than last year.  As for new development, its rating was rock-bottom. 

However, feelings about retail are diverse, depending upon product and location. Urban/high street retail is the third-highest-ranked subsector, while neighborhood/community shopping centers and lifestyle/entertainment centers received moderate ratings. At the other end of the spectrum, power centers and regional malls were in the cellar.

Investors are focusing on smaller centers, including lifestyle/entertainment, grocery-anchored, and even niche power centers. Lifestyle/entertainment centers are often part of mixed-use development.

retail top issues

The strong performance of high-quality malls and the rise of mixed use retail

Class A malls have proved to be strong performers. Investors are focusing on smaller centers, including lifestyle/entertainment, grocery-anchored, and even niche power centers. Lifestyle/entertainment centers are often part of mixed-use development. 

retail mixed use development

Urbanization

High street retail has come to prominence in the past decade for institutional investors. Originally, this referred to the high fashion streets, such as Fifth Avenue, Madison Avenue, West 57th Street, Rodeo Drive, and a few others. In more recent years, the universe of high-profile streets has increased considerably to include such locations as SoHo and the Meat Packing District in New York, Beverly Drive and Melrose Avenue in Los Angeles, an expanded area around Union Square in San Francisco, and other locations across the United States. These properties are typically small, but are pricey on a per-square-foot basis. Investors have attempted to scale these acquisitions to create portfolios. Historically in the hands of private and family investors, these assets are increasingly owned by institutions and REITs.

retail urbanization

The e-commerce boom and the changing role of the physical store

Within the retail industry, a consensus is emerging that e-commerce will decrease the overall demand for retail space, but will not come anywhere close to supplanting it. As retailers evolve, they realize that an integral relationship exists between the internet and the store, with the store playing a strong role in customer purchases, even those made online. Research has shown that a consumer may touch the retailer at many points along the route to transaction, possibly researching a product online, experiencing it in-store, sharing with friends for input, and then possibly buying online later for delivery or for in-store “click and collect.” Both retailers and center owners are investing extensively in technology to better understand core customers to further drive sales. Particularly in the mall and lifestyle subsectors, a belief is emerging that high-quality malls will continue to increase in value.

online retail investors

Department store and big box woes result in new anchor tenants

Institutional investors and major REITs have largely sold off their Class B or C malls. Nevertheless, opportunistic retail investors do exist, buying at low cost. While some intend to improve these centers, most are looking to repurpose property.

Grocery-anchored centers have long been popular for their relative stability and immunity to e-commerce. A well-located center might add a mini-anchor and fast-casual restaurants, as well as local services, increasing the traffic draw and the resultant cash flow. Some favor niche centers anchored by such specialized grocers, which tend to achieve high sales volumes and traffic from affluent shoppers.  A developer noted that “good grocery can be incorporated into everything. It is a great attraction.”

Power centers fell out of favor years ago. They are particularly vulnerable to e-commerce and unattractive in terms of customer experience. At a focus group in Austin, a participant said that “it is a lot harder to do big box.” At an Indiana focus group, a participant noted that “really big boxes are dead, most likely due to the e-retailer effect. They will be trying to retool.”

Many discount retailers remain quite viable. U.S. consumers strapped for cash shop primarily in such stores, and not primarily online. Clever developers are including the more successful discounters in lifestyle and grocery-anchored centers or in street frontage urban locations where they are part of consumers’ daily travel.

Outlet centers have been quite successful in recent years, and are dominated by a few public REITs. However, in our subsector survey, they received low ratings for investment and development opportunity. Several analysts felt that this subsector was being oversupplied and is losing some of its luster.

retail store closings

The last mile

Unquestionably, e-commerce is transforming warehouse demand. A trendier part of the market is “the last mile” distribution center.  This subsector scored the highest rating in our survey. E-commerce vendors are increasingly offering practically immediate delivery in some markets, so they require distribution facilities close to the customer. These are inexpensive locations in a broad range of sizes, and may be newly built or adaptations of older buildings. These have considerable pricing power. 

retail warehouses and e-commerce

Transforming the customer experience

More retail stores will be transformed into places that sell experiences, rather than goods.  Successful retailers will incorporate ambiance, design and sense of place into the overall consumer experience. 

smart retailers

Contact us

Byron Carlock, Jr.
US Real Estate Leader
Tel: +1 (214) 754 7580
Email

Mitch Roschelle
Real Estate Advisory Leader, US
Tel: +1 (646) 471 8070
Email

Contact us

Byron Carlock, Jr.
US Real Estate Leader
Tel: +1 (214) 754 7580
Email

Cathy Helmbrecht
US Real Estate Assurance Leader
Tel: +1 (214) 754-7988
Email

Paul Ryan
US Real Estate Tax Leader
Tel: +1 (646) 471 8419
Email

Tim Mueller
US Real Estate Advisory Leader
Tel: +1 (646) 471-5516
Email

Tom Wilkin
US REIT Leader
Tel: +1 (646) 471 7090
Email

Jeff Kiley
US Private Equity Real Estate
Tel: +1 (646) 471 5429
Email

Tim Conlon
US Real Estate Clients and Markets Leader
Tel: +1 (646) 471 7700
Email

Follow us
Follow us