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Given the current state of retail in America, investing in a mall or shopping center today may seem as wise as purchasing Pompeii real estate during the eruption of Mount Vesuvius.
We have all read about the continuing devastation wrought by online retailers upon hapless brick-and-mortar retailers. In 2019, roughly 9,300 retail stores closed, up from 5,844 in 2018. In the last three years alone, once-formidable firms, from Barney’s New York and Sears to RadioShack and Toys“R”Us, filed for bankruptcy, leaving many malls struggling to fill the vacancies.
As disheartening as these tales from the so-called retail apocalypse may be, they tend to exaggerate the severity of the situation. According to recent reporting, for every retailer that closes a store, 5.2 retailers open a new location. In addition, a minority of retail chains are driving the majority of store closures. In 2019, as reported by The Motley Fool, just 16 retailers were responsible for 73% of closures.
Experiential Retail To The Rescue
Most importantly, these dire reports often overlook the emergence of a powerful new brick-and-mortar business model called experiential retailing.
An evolutionary response to online retailing, experiential retailing is transforming many shopping outlets from transactional warehouses into brand and product showcases that attract consumers with a combination of omnichannel shopping experiences and multi-sensory entertainment.
For example, at online fashion retailer Farfetch’s “store of the future” in London, consumers are provided with a sign-in screen to search their purchase histories and wish lists, as well as fitting-room smart mirrors that let them see different sizes and alternative products — and even pay for their purchases without leaving the dressing room.
Elsewhere, pop-up restaurants, shops, showrooms, galleries and other temporary spaces are generating brand excitement and helping retailers engage with new customers, especially millennials, who have a preference for the kinds of experiences — e.g., dining out, hearing live music, trying on clothing — that no virtual store can replicate.
Experiential retailing may explain (in part) why rental growth increased and vacancy levels decreased across all commercial property types in 2019.
Strategies For The Experiential Era
How should landlords and commercial real estate investors respond to this trend? Here are four observations and recommendations:
1. Consumer expectations for retail have radically changed. As Daniel B. Kline points out, consumers crave choice in both their in-store and online shopping experiences. Retailers that embrace omnichannel and experiential retail will thrive.
Yet, the fundamentals of real estate still apply. It’s important to recognize, despite the new trends, that the fundamentals of commercial property investment and management have not been suspended. When it comes to selecting a good retail property, location is still king. And the best locations are those near major transportation arteries and high-density residential and/or commercial districts.
2. Evaluate the financial health of current and prospective tenants. Property owners should pay close attention to a retailer’s available cash before considering any turnaround plans. If a retailer does not have a sizeable budget (or financiers willing to fund significant changes), their chances of success are slim.
3. Be prepared for more department store closures, as well as the closures of many other mall staples. They’ll be replaced by smaller stores and digital-native brands like Warby Parker, Buck Mason, Glossier and Revolve (to name a few) that are seeking to add the convenience and experiences that come with brick-and-mortar locations.
4. Know that some pop-ups — typically, those that don’t require much site modification — are better than others. In general, there isn’t much risk to leasing space on a short-term basis, as long as the retailer has obtained the necessary permits from the city and mixes well with other tenants. Obviously, vacant space in a retail center is aesthetically unappealing and can negatively impact the property value if it remains vacant for too long.
The retail apocalypse is not a genuine cataclysm, but merely a rinsing of those retailers that have failed to adapt with the times. And though the rise of experiential retail may seem revolutionary, it is less a revolution than an evolution — an adaptation to online retail competition and changing consumer expectations about what a physical store should be.