A Click Away – eCommerce’s Impact on Retail Real Estate

This article is the second in a series on how eCommerce is affecting the retail and industrial real estate markets. It’s incredible how rapidly eCommerce has transformed the retail industry and how companies have been forced to change their entire approach in terms of commercial real estate. It’s what we call newCommerce. At the beginning of the year 2000, the online world was very different. Companies around the world had just “survived” Y2K, the dot-com bubble was just about to burst, and Amazon was just five years old (and not even profitable yet). (Shaded areas in the chart represent U.S. recessions) At that point in time, eCommerce represented just 0.6% of total retail sales. But since that point, that percentage has continually grown, eventually reaching a new high of 8.9% in Q2 2017 – a trend which has shown no signs of stopping. The overall volume of retail sales (in-store and online) is still there. But the balance between the two has continued to tilt. It’s not too hard to imagine a world in which someone could literally order anything they needed – from books to food to furnishings – online and have it shipped directly to their home – never setting foot in a retail store. But that’s not what is actually happening. While eCommerce has been the driving force behind the current evolution of retail, eCommerce itself is evolving at a breakneck pace. The Age of Pure Play eCommerce (1995 – 2010) was about the rise of online only retailers and saw both the emergence of today’s giants (Amazon) as well as a slew of failed concepts—especially during the 2000/2001 tech wreck. During this era, the mindset was that the value offer to consumers was cost. As such distribution strategies focused around building fulfillment centers in tax-advantaged states. Jeff Bezos and Amazon flipped that script starting in 2010 with the idea that speed and convenience were the true value offerings of eCommerce. Since then, Amazon has built nearly 100 million square feet of distribution centers across the country, with over 90% of the continental United States now within range for next day delivery. It’s no coincidence that during this time, Amazon catapulted to being the undisputed eCommerce leader. By 2014 this had sparked what we call the Omnichannel Era (2014- 2017), as bricks-and-mortar players sought to ramp up their eCommerce capabilities to keep pace with Amazon. The Omnichannel Era continues, even as we are moving into a new phase. The newCommerce Age is where we are now seeing the true and total integration of eCommerce and bricks and mortar retail real estate. This reflects not just the entry of formerly pure play online players (Amazon, Fabletics, Untuckit, Warby Parker, Bonobos and others) into the bricks and mortar arena, but also the start of traditional retailers embracing merchandise-free stores and showrooms where eCommerce and traditional retail are the same. We anticipate this new era of total integration to be the dominant trend of the next few years and one that is already playing out in major ways. The June acquisition of Whole Foods by Amazon reflects part of this wave. While many landlords of traditional grocery-anchored neighborhood shopping centers were fearful that Amazon’s entry to eGroceries would create the same kind of disruption that Mr. Bezos and crew created in traditional retail, the opposite is true here. Profitable eGrocery delivery simply wouldn’t work with Amazon’s traditional warehousing model. However, using bricks-and-mortar stores as distribution points, truly integrating clicks and bricks, likely will. New Dynamic Challenges Retailers This ongoing shift in consumer behavior has created a number of effects across the global retail real estate market. Numerous anchor tenant brands – from Sears to Toys R Us – have undergone major restructuring during the past several years. And as those tenants have struggled, so have many shopping centers. While Class A spaces continue to perform well, many lower-tier shopping centers are confronting a challenging market. Perhaps exacerbating that problem in the U.S. may have been the amount of existing retail real estate. Data from Cushman & Wakefield’s Retail Group finds that for every American, there are 22.9 square feet of gross leasable area in U.S. shopping centers. That’s nearly double the per-capita space found in Canada (13.1 SF) – which ranked 2nd in the world. Most European countries averaged closet to 3 SF per capita. Rise of Experiential Retail Customers still want retail outlets near them. But the market has also pushed many retail operators and brands to reinvent themselves as “experiential retail” and move away from traditional sales concepts. Coverage devoted to the growth of millennials has been extreme, but in this case it is a perfect reflection of the shifting market. A Harris survey of Millennials found that 78% would prioritize spending on an experience (such as dining out with friends) over the purchase of a physical item, and more than 70% wanted to spend even more on experiences in the future. With department store-sized holes in many shopping centers, mall operators have looked to fill them with tenants which meet that need. Restaurants, fitness concepts, and other types of businesses are moving in. Many existing brands and market segments are also radically changing how they do business. For example, shoe retailer M.Gemi has a location at the Prudential Center in Boston. But its location is unique in that when customers come in and find a pair of shoes they like, they can’t walk out with them. Instead, they place the order in the store – just like they would online – and it’s shipped to them free within a few days. How the retail market as a whole will continue to evolve remains to be seen. But one thing is clear – online purchases have permanently changed the retail estate market, and the shifts it has produced are only just beginning.