By Laura Hulberg
We learn more from the times we were wrong than from the times when all our predictions hit the mark.
Beginning in about 2010, commercial real estate investors and their stables of advisors predicted the impending death of retail. As stores saw less foot traffic in favor of online shopping, the term “retail apocalypse” was coined, referring to the closing of many brick-and-mortar stores nationwide. This phenomenon particularly focuses on consumer goods such as clothing and electronics. Retail brands braced themselves against other challenges, too, such as rising crime and vandalism in metro areas, increasing rental rates, and other factors increasing overhead. Lastly, the pandemic exacerbated these challenges, leading to widespread store closures and a significant decline in foot traffic. The combination of increased expenses and decreased revenue spelled financial failure on a national level.
This year, Macy’s announced plans to close around 150 underperforming stores over the next three years. Of note, the closures will dump about a quarter of Macy’s square footage which represents about 10% of the retailer’s sales. Macy’s cited lax business practices and competition from online retailers as the primary drivers of the closures.
The exception to the trend has been grocery stores, which emerged as a bright spot in the pandemic. This subsector continues to hold its stability over other types of retail, evidenced by higher occupancy rates and lower turnover.
The pandemic presented a real sink-or-swim environment in which businesses were challenged to adapt to the needs of their customers, employees, and local regulations. Some of the safety measures that were implemented during the Covid era not only reassured customers about their health and safety but also made shopping more convenient. From hand sanitization stations to contactless payments, these safety protocols have shifted the shopping experience in modern retail stores.
Another pivot that helped retailers survive the pandemic and beyond is omni-channel integration, where retailers blend online and offline experiences. The most common example of this is the buy online, pick up in-store, or curbside model. Taking technology a step further, savvy retailers with sizeable advertising budgets are able to use data analytics and customer insights to create targeted marketing campaigns for their typical customers.
Keeping the momentum they regained in 2020 and 2021, retailers are now finding ways to continue to innovate to entice shoppers back to physical stores. Tech-savvy brands now offer a mix of ways to engage with technology in-store from augmented reality (AR) try-ons, AI-powered chatbots, and mobile apps for seamless shopping. Retailers that have had the most success with integrating technology into their shopping experience include it as one of several options; sometimes, you just want to get rung up by a human being.
According to Colliers, demand for retail space has surged by 54 million square feet in the past twelve months, with the most demand from food and beverage, discount, and experiential subtypes. Shopping centers are faring better than malls, with 4.9% and 8.8% vacancy rates, respectively.
Experiential retail is really having its moment in the retail sector. Shifting away from quick transactions, companies now find ways to create experiences with longer duration in-store, such as workshops, events, interactive displays, photo opportunities, and other social-driven activities.
How do these innovations in the retail renaissance impact value? Well, it’s not as direct of an impact as you’d think. There is no direct, reliable correlation between dollars spent creating the in-store experience and value recaptured. Real estate appraisers are trained to look beyond the Instagrammable backdrop, the nice lighting, and AR headsets. In our work, we are more concerned with how these trends shape demand for different retail subtypes, locations, and power capacity. What premium will a buyer or lessee pay for the right location for their Build-a-Bear store within a mall? All these questions are answered through careful market analysis in each Valbridge appraisal.
The retail market surprised even the most experienced commercial real estate players with its resilience and adaptability in the post-Covid era. Embracing safety measures and technological advancements have been the key to bringing shoppers back to brick-and-mortar stores. The only way to know for sure is to stay on top of real data – transactions, inventory, market participant surveys, and other indicators of market health. Keep in touch with Valbridge Property Advisors and stay informed about commercial real estate market trends that may impact you.