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Commercial real estate investors, lenders and service providers are cautiously reading the headlines of yet another store closure announcement. The latest is another household name: Payless Shoes. The announcements seem to place yet another nail in the coffin of a dying industry, yet commercial real estate professionals feel differently. Are stakeholders turning a blind eye to the inevitable, or seeing this as a piece of a larger puzzle?
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I have worked in commercial real estate, specifically retail projects, for the past 15 years, most recently as the founder of a full-service brokerage firm specializing in retail projects. We buy, sell, lease and manage shopping centers, and like our peers, we are happy about it. We are careful to say that little will change and retail as we know it will always exist; however, our optimism about the new opportunities that will emerge in our industry outweighs our desire to cower in fear with each new headline. How? We balance the headlines with reports that consumer spending reached a six-year high last year.
The relationship between online traffic and physical locations is still being understood, but data suggests the relationship is not mutually exclusive, but rather mutually beneficial. A 2017 study found that for each dollar that is generated in online sales from reviews, another $4 to $6 is generated in sales at a brick-and-mortar counterpart. This reveals a significant motivator for online sales: information and transparency. Consumers will spend days, weeks or even months researching a product, and will often opt to purchase the item in-store. Web-based sales channels are not taking retail sales from brick-and-mortar locations; the information they provide online is driving new sales to the brick-and-mortar counterparts. Savvy retailers with a knack for creating an inviting destination for consumers can see a positive future for retail.
Online-only retailers are also pivoting their stance on web-only sales and opening brick-and-mortar locations. Warby Parker is a great example of an online retailer that saw opportunity in opening a physical location. Its online web traffic essentially acts as a funnel to the physical location and translates into sales of over $3,000 per square foot, according to one analysis. That is higher than even Tiffany’s. Today’s retailers use the information they gather about their customers to make more informed real estate decisions. Using the data from online sales, they are able to identify the ideal demographic makeup of the most profitable customers and select locations based on that data. This eliminates much of the guesswork that was used for site selection in the past for newer concepts that did not have existing store data to rely on. The trend is not in omitting physical locations, but rather in using information gathered online to better serve retail clients in the store.
In the past, stores relied on the experience gathered from the successes and failures of multiple locations in order to determine the ideal size and location of future stores. Online retailers have a significant advantage in knowing an unprecedented (even an uncomfortable) amount of personal information about each of their buyers. They know where they live, what they like and don’t like, marital status, age and where they work. Using this information, online retailers are able to bypass years of experience that was once needed to successfully open new locations.
It is exciting for me to see smaller regional and even local retailers begin to use this rich data to level the playing field and compete with the big players. Recently, landlords have become more comfortable with smaller concepts that have successfully created a following online and in-person than with large brands that are out of touch with their consumers. Lenders are slower to match the acceptance of the investors; however, I foresee that beginning to change over time as well. On the investment sales side, we still see a strong preference for national names on the rent roll from out-of-state investors — but with record-low cap rates, investors are seeing opportunities to make their margins with the overlooked smaller retailers who often outperform their national competitors.
Retailers making the move to brick-and-mortar locations should approach lease negotiations cautiously. National concepts are notoriously difficult to work with, especially those with low margins. Some use their collective set of negative landlord experiences to push for tenant-friendly leases. Landlords have, in the past, given up key negotiating points because the increased value with a national tenant offset most negatives or financial loss. Online-only retailers opening their first locations do not have the experiences with landlords, economic downturns and so on to know what to push for, nor do they provide owners with the same increase in value to the property. On the other hand, this is a reason why many investors, tired of being pushed around by major tenants, are inviting new players to the table, and why we are seeing local tenants obtain locations that historically they would not have been presented with.
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Two-thirds of last year’s store closures were comprised of just 16 concepts. Most would argue those closures were as a result of strategy and consumer preference rather than a sign of an overall change in consumer spending. Retailers should pay close attention — this is an opportunity. Consumers are spending their time researching online but walking into stores in search of an experience. The data collected from consumers online can be used to create exactly what shoppers are looking for and retailers must be prepared to meet that need. Simply having product in stock is not enough in today’s environment. Savvy investors and developers of shopping centers are modifying their strategies to account for the new environment. Today’s shoppers want to be entertained and educated and feel a sense of connection with the brand, which creates opportunities for landlords and tenants alike.